Gone Fishin': Seasonality in Trading Activity and Asset Prices

We use seasonality in stock trading activity associated with summer vacation as a source of exogenous variation to study the relationship between trading volume and expected return. Using data from 51 stock markets, we first confirm a widely held belief that stock turnover is significantly lower during the summer because market participants are on vacation. Interestingly, we find that mean stock return is also lower during the summer for countries with significant declines in trading activity. This relationship is not due to time-varying volatility. Moreover, both large and small investors trade less and the price of trading (bid-ask spread) is higher during the summer. These findings suggest that heterogeneous agent models are essential for a complete understanding of asset prices.

[1]  Ian Garrett,et al.  Winter Blues and Time Variation in the Price of Risk , 2003 .

[2]  Short Sale Constraints and Stock Returns , 2002 .

[3]  Edward M. Saunders.  Stock Prices and Wall Street Weather , 1993 .

[4]  E. Fama,et al.  Industry costs of equity , 1997 .

[5]  Y. Amihud,et al.  Asset pricing and the bid-ask spread , 1986 .

[6]  M. Harris,et al.  Differences of Opinion Make a Horse Race , 1993 .

[7]  J. Stein,et al.  Breadth of Ownership and Stock Returns , 2001 .

[8]  Patricia M. Dechow,et al.  Short-sellers, fundamental analysis, and stock returns , 2001 .

[9]  M. Nimalendran,et al.  Price reversals : Bid-ask errors or market overreaction? , 1990 .

[10]  Donald B. Keim.  SIZE-RELATED ANOMALIES AND STOCK RETURN SEASONALITY Further Empirical Evidence , 1983 .

[11]  W. S. Chan,et al.  Stock Price Reaction to News and No-News: Drift and Reversal after Headlines , 2001 .

[12]  Natalia Scotto Piqueiraa.  Trading Activity , Illiquidity Costs and Stock Returns ¤ , 2022 .

[13]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[14]  R. Roll.  Vas Ist Das? , 1983 .

[15]  Robert B. Barsky,et al.  The Seasonal Cycle and the Business Cycle , 1988, Journal of Political Economy.

[16]  J. Ritter.  The Buying and Selling Behavior of Individual Investors at the Turn of the Year , 1988 .

[17]  Jiang Wang,et al.  A Model of Competitive Stock Trading Volume , 1994, Journal of Political Economy.

[18]  Anat R. Admati,et al.  A Theory of Intraday Patterns: Volume and Price Variability , 1988 .

[19]  E. Miller.  Risk, Uncertainty, and Divergence of Opinion , 1977 .

[20]  J. Wei,et al.  Stock market returns: A note on temperature anomaly , 2005 .

[21]  Ronnie Sadka,et al.  Seasonality in the cross-section of stock returns , 2008 .

[22]  E. A. Dyl,et al.  CAPITAL GAINS TAXATION AND YEAR‐END STOCK MARKET BEHAVIOR , 1977 .

[23]  D. Hirshleifer,et al.  Good Day Sunshine: Stock Returns and the Weather , 2001 .

[24]  Lisa A. Kramer,et al.  Winter Blues: A Sad Stock Market Cycle , 2003 .

[25]  Frederick Robertson Macaulay,et al.  Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856. , 1938 .

[26]  Jeffrey A. Miron,et al.  The Seasonal Cycle and the Business Cycle , 1988, Journal of Political Economy.

[27]  W. Ferger,et al.  Seasonal Variations in Industry and Trade. , 1934 .

[28]  Andrei Shleifer,et al.  Window Dressing by Pension Fund Managers , 1991 .

[29]  J. Stein,et al.  Disagreement and the Stock Market , 2007 .

[30]  Wei Xiong,et al.  Overconfidence and Speculative Bubbles , 2003, Journal of Political Economy.

[31]  Zhiwu Chen,et al.  A Valuation Study of Stock-Market Seasonality and Firm Size , 2001 .

[32]  David M. Kreps,et al.  Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations , 1978 .

[33]  Frederick Robertson Macaulay,et al.  Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856. , 1938 .

[34]  Marc R. Reinganum.  The anomalous stock market behavior of small firms in January: Empirical tests for tax-loss selling effects , 1983 .

[35]  Ben Jacobsen,et al.  The Halloween Indicator, 'Sell in May and Go Away': Another Puzzle , 2001 .

[36]  Charles M. C. Lee,et al.  Inferring Trade Direction from Intraday Data , 1991 .

[37]  L. Summers,et al.  Noise Trader Risk in Financial Markets , 1990, Journal of Political Economy.

[38]  Jeffrey Pontiff,et al.  How Are Derivatives Used? Evidence from the Mutual Fund Industry , 1999 .

[39]  Ning Zhu,et al.  Do Noise Traders Move Markets? , 2006 .

[40]  Jonathan M. Karpoff.  The Relation between Price Changes and Trading Volume: A Survey , 1987, Journal of Financial and Quantitative Analysis.

[41]  Sanford J. Grossman,et al.  Liquidity and Market Structure , 1988 .

[42]  The market for borrowing stock , 2002 .

[43]  Jiang Wang,et al.  Trading Volume and Serial Correlation in Stock Returns , 1992 .

[44]  David A. Chapman,et al.  Why constrain your mutual fund manager , 2004 .

[45]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .