What is... | October 28, 2015

What is the Halloween indicator in financial markets?

Think of Halloween and scares probably are front of mind. Trick or treat. Ghouls and carved pumpkins. In share markets, it appears investor behaviour can also be skewed by scares that accompany dark nights and downbeat emotions associated with the end of summer in the Northern Hemisphere.


The phrases “sell in May” (ideally, when prices are high) and “buy on Halloween” (if prices are in a dip) are well known. This “Halloween indicator” will not work every year but research suggests there is some evidence to back it up, on average. It is one of a range of calendar effects that some believe exist in financial markets.

More than three hundred years ago...
Academics studied the Halloween indicator and say they found evidence of the mysterious market anomaly as far back as 1694. In a blog post for eZonomics on the best research of 2012, economist Chris Dillow picked a Halloween indicator study from Ben Jacobsen and Cherry Zhang of Massey University in New Zealand, revised in 2014. The pair studied the history of world share markets and found that the rules “buy on Halloween” and “sell on May Day” work well. On average, equity returns are several percentage points higher between 31 October and 30 April than from 30 April to 31 October.
As Dillow notes, this doesn’t mean prices always decline between May Day and Halloween. But it does mean the odds are against the market doing well.

A bump in the night
Factors behind the Halloween indicator are not entirely clear but investor sentiment may play a role. The advice to “sell in May, and buy on Halloween” warns that investors are apt to shift from optimism to pessimism in the summer, and back again in the winter, as Dillow also says. However, share market shifts are notoriously unpredictable.

Check your calendar
What about public holidays, the month in the year, or the start of daylight saving? Can these have an effect on share market prices? As strange as it may sound, some argue they can – and that these “calendar effects” present opportunities that investors can exploit to make money. Many are detailed here.
It is worth noting, however, that the existence of calendar effects is highly contested. And even if they occur, markets can adapt as people try to cash in. If a lot of investors buy shares because they expect lower prices at a certain point in time, that demand could “correct” the price – reducing any calendar effect or making it disappear altogether.

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eZonomics team
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