A very average start to 2017

The following chart plots the daily returns of the FTSE 100 Index for the nine days around Christmas and New Year.

The blue bars plot the average daily returns of these days for the period 2000-2016. The orange bars plot the daily returns for the last nine days.

FTSE 100 Index daily returns around Christmas and New Year [2017]

As can be seen the actual daily returns for the last nine days have been on the whole pretty close to the average daily returns seen for the last 16 years..

  • Strong returns have been seen on the trading days following Christmas and New Year.
  • After the first day after New year, returns have trailed off (days 8 and 9 in the chart).
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Market returns around Christmas and New Year (update)

This updates the previous analysis of the historical behaviour of the FTSE 100 Index since 1984 for the nine days around Christmas and New Year. The days studied were:

  • Days 1-3: the three trading days leading up to Christmas.
  • Days 4-6: the three trading days between Christmas and New Year.
  • Days 7-9: the first three trading days of the year.

The following chart shows the average returns for these nine days around Christmas and New Year.

FTSE 100 average daily returns around Christmas and New Year [1984-2015]

Notes:

  1. The average daily change of the FTSE100 index from 1984 for all days is 0.03%, so it can be seen that all nine days around Christmas and New Year are stronger than the average daily returns for the rest of the year.
  2. Generally, the market strength increases to the fourth day (the trading day immediately after Christmas) – this is the strongest day of the whole period, when the markets increases 83% of years since 1984 with an average return on this day of 0.47%. Although it should be noted that the standard deviation is the second highest on this day, meaning that the volatility of returns is greatest (the index actually fell 3% on this day in 1987 and 2002).
  3. The weakest day in the period is the third day of the New Year.
  4. The new year generally starts strongly on the first day, with performance trailing off the following two days.

The following chart shows the proportion of returns that are positive for each of the nine days.

FTSE 100 positive daily returns around Christmas and New Year [1984-2015]

The profile is similar to that for the average returns: the market is increasingly strong to the first day after Christmas, and then drops off after that.

To check the persistency of these results, the following chart compares the average daily returns for each day for the period 1984-2015 (i.e. as above) with the shorter period 2000-2015.

FTSE 100 average daily returns around Christmas and New Year

Broadly, the behaviour in the last 15 years has been similar to that for the longer period since 1984. The one obvious difference has been the extraordinarily strong average returns on the first trading day of the year seen since 2000.


 

Extract taken from the newly published UK Stock Market Almanac 2016.

Order your copy now!

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Easter holidays and the stock market

What impact, if any, does the Easter holiday have on the market?

A previous post looked at the behaviour of the market around holidays (sometimes referred to as the holiday effect). In this post we will narrow the focus to look at the behaviour of share prices around the Easter holiday.

The following chart shows the average daily returns for the FTSE 100 Index for the four days before, and three days after, the Easter holiday over the period 1984-2013.

Average daily returns of the FTSE 100 around Easter [1984-2013]The general profile of behaviour around Easter is similar to that seen before for all holidays.

The main differences are that H(-4) is significantly weak, and the average returns for the two days immediately before and after Easter are significantly higher than for all holidays. For example, the average return for H(-1) is 0.4% (13 times greater than the average return for all days in the year); for all holidays the figure is 0.2%. The standard deviation for the Easter H(-1) average return is also significantly low.

The following chart is similar to the above, but this time the period studied is 2000-2013.

Average daily returns of the FTSE 100 around Easter [2000-2013]This second chart suggests that the behaviour of the market around Easter has not changed significantly in recent years.

 

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US holidays and European markets

Summary

European stock markets tend to have positive and high returns on days when the NYSE is closed. The effect is significant when the previous day’s return on the NYSE has been positive.

Brief overview

The US has six holidays every year that are not holidays in Europe:

  • Martin Luther King Day (the third Monday in January)
  • President’s Day (the third Monday in February)
  • Memorial Day (last Monday in May)
  • Independence Day (the fourth of July)
  • Labour Day (the first Monday in September)
  • Thanksgiving day (the fourth Thursday in November)

How do the European equity markets  behave on these days when the US markets are closed?

This was the question asked by the authors of an academic paper (Casado, Muga and Santamaria, 2011).

The authors analysed open and close values for the CAC40, DAX, FTSE 100, IBEX35 and EUROSTOXX50 (for the euro-zone stock market)  for the period 1991-2008. Their results were remarkable.

Their research found the average daily returns for the European markets when the US market was closed was 0.32%, which was 15 times greater than the daily returns on all days.The greatest (NYSE-closed) daily returns were 0.42% for the German market.

Interestingly they found similar results for the open to close data on the NYSE-closed days. Meaning that the information from the previous day’s US market had been fully absorbed at the market open, and the effect is attributable to European trading.

Because the effect is so great it has a clear economic significance as it is possible to obtain significant returns after deducting trading costs by trading index futures.

The following figure from the paper shows the result of systematically buying FTSE 100 futures at the open on a NYSE-closed day and where the previous day’s NYSE return was positive, and then closing the position at the close on the same day. The red line is the equity chart for the strategy (left axis), and blue line the FTSE 100 Index (right axis).

Casado_The effect of US holidays on the European marketsThe strategy had positive returns in both bull and bear periods for the market.

Reference

Casado, Jorge and Muga, Luis and Santamaria, Rafael, The Effect of US Holidays on the European Markets: When the Cat’s Away (2011)

 

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Holidays and the market

An academic paper (Ariel, 1990) was published with the finding that the trading day prior to holidays in the US market had an average return 14 times greater than the average for the other days in the year. This, and other papers, found that the day immediately before holidays had the highest returns (in the period around holidays), with the third day before the holidays having the next highest return and the day following the holiday having negative returns.

More recently this was updated in a paper (Ziemba and Dzahabarov, 2011) that found that the holiday effect had diminished in the 1990s and 2000s and that the out-performance was occurring largely in just the third day before holidays.

Does such a holiday effect exist in the UK market?

The following charts show the results of analysis of the daily returns of the FTSE 100 Index around holidays. The days studied were the four trading days immediately prior to holidays, H(-4) to H(-1), and the three trading days after holidays, H(+1) to H(+3). A holiday was defined as a 3-day (or longer) period with no trading.

1984-2013

The following chart shows the average returns for the seven trading days around holidays for the period 1984-2013.

Holiday effect FTSE 100 average returns [1984-2013]We can see that, as with the US studies, H(-3) and H(-1) were strong during the holiday periods. Although, unlike the US studies, the day after a holiday, H(+1), was also found to be strong – this day has an average return of 0.17% (six times greater than the average return for all days in the year).

The following chart shows the proportion of positive returns for the same period.

Holiday effect FTSE 100 positive returns [1984-2013]The profile is broadly similar to that for the average returns: H(-1) and H(-3) are strong, as is H(+1). The weakest day around holidays has been H(+3)  – the only day with a negative return and proportion of positive returns under 50%.

2000-2013

To look at the persistency of these results, the following charts restrict the study to the more recent period 2000-2013.

Holiday effect FTSE 100 average returns [2000-2013]Holiday effect FTSE 100 positive returns [2000-2013]

It can be seen that the UK holiday effect has changed slightly in recent years.H(-1) is still relatively strong, H(-3) less so, but the main change has been the relative strength of H(+1).

References for the holiday effect

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Market returns around Christmas and New Year

This analysis looks at the historic behaviour of the FTSE 100 Index since 1984 on the days around Christmas and New Year. The days studied were:

  • Days 1-3: the three trading days leading up to Christmas.
  • Days 4-6: the three trading days between Christmas and New Year.
  • Days 7-9: the first three trading days of the new year.

The following chart shows the average returns for these nine days around Christmas and New Year.

Average day returns around Christmas (2013) And the following chart shows the proportion of positive returns on the nine days.

Positive day returns around Christmas (2013)

Analysis

  1. The average daily change of the FTSE100 index from 1984 for all days is 0.03%; it can be seen that all nine days around Christmas and New Year have higher average returns than the average for all days.
  2. The strongest days are historically the two days leading up to Christmas and the two immediately following it.
  3. Generally, the market strength increase to the fourth day (the trading day immediately after Christmas) – this is the strongest day of the whole period, when the markets increases 81% of years since 1984 with an average rise of 0.34%. Although it should be noted that the standard deviation is the highest on this day, meaning that the volatility of returns is greatest (the index actually fell 3% on this day in 1987 and 2002).
  4. The weakest day in the period is the final trading day of the year – this is perhaps not surprising with traders closing positions for the year end.
  5. The new year generally starts strongly, but not as strong as those days of the week before.
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