Dec

11

Motivated by Mr. McCauley’s article Market Irony and the October 1987 Crash, I inquired whether stock indices might exhibit non-random behavior around “significant” dates. More specifically, I investigated the returns of the S&P500 index around the 4th of July as a major secular US holiday.

In the years between 1950 to 1977, S&P500 percentage returns on the trading day before 4th of July have been significantly positive, on average by 0.43%. Percentage returns on the trading day after Independence Day (”ID”) have also been positively correlated to pre-ID returns by 0.40, albeit no significance of those returns is found. The late 70’s however present a break for this relationship. Between 1978 and 2006 neither pre-ID nor post-ID returns are significant. Similarly, correlation between both returns is merely 3.6% whereby both return series exhibit significantly higher variances than between 1950 and 1977.

Had I not investigated the robustness of my results, I might have inferred that S&P500 pre-ID returns are significantly positive, even nowadays. In fact, testing for the whole period 1950 to 2006 would support this: returns lie between 0.08% and 0.42% with 95% confidence. Pre-ID returns would not significantly differ from zero, had it not been for the pre-’78 period with a 0.45% return on average.

This short study of equity returns around Independence Day once again illustrates the nature of market phenomena and the notion (not theory) of ever-changing cycles and the resulting necessity to investigate the robustness of estimates. What was a profitable strategy till the late 70’s no longer works today (post-’78 returns are positively biased solely by the previous sample interval). I found it furthermore striking to observe S&P500 pre-ID returns to be positive for 17 consecutive years (’53 - ‘69).

Before opening the discussion to the floor, it might be of interest to investigate equity or bond returns around “significant” days, be they major secular or religious holidays or certain anniversaries. Similarly, perhaps fellow DailySpecs might want to expand on my findings, testing various other US indices for perhaps a longer sample period to see whether we can establish corresponding return behavior.

Appendix: Data


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