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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Average market behaviour in April

The following chart plots the average performance of the FTSE 100 Index during April since 1984 (more info on this type of chart).

FTSE 100 average month chart for April [1984-2013]As can be seen, historically the market has on average generally risen steadily throughout the whole month of April, ending at the high for the month.

March 2014

The following chart shows the average performance of the market in March (1984-2013) and overlays the actual performance in March 2014.

Average month chart - March overlay March 2014 (2014)In March 2014 the big difference from the average March was the weakness in share prices in the first two weeks of the month.

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2014 1Q market review – comparative performance of FTSE 350 sectors

The following chart shows the performance of the FTSE 350 stock sectors in the first quarter 2014.

FTSE 350 sector performance 2014 1Q26 of the 38 sectors out-performed the FTSE 100 Index in the first quarter of 2014.

The data for the above chart are given in the following table.

FTSE 350 Sector TIDM Rtn 2014 1Q (%)
General Retailers 11.2
Oil Equipment, Services & Distribution 11.1
Real Estate Investment & Services 7.8
Construction & Materials 7.4
Health Care Equipment & Services 7.1
Real Estate Investment Trusts 5.3
Electricity 5.0
Automobiles & Parts 4.6
Household Goods 4.1
Food Producers 3.4
Tobacco 3.2
Gas, Water & Multiutilities 3.0
Industrial Engineering 2.5
Pharmaceuticals & Biotechnology 2.5
Chemicals 2.2
Financial Services 2.2
Software & Computer Services 2.2
Support Services 1.8
Industrial Transportation 1.7
Mining 1.4
Nonlife Insurance 1.2
Travel & Leisure 0.5
Equity Investment Instruments 0.3
Forestry & Paper 0.3
Fixed Line Telecommunications 0.2
Life Insurance -1.9
FTSE 100 -2.2
Oil & Gas Producers -2.6
Technology Hardware & Equipment -4.0
Beverages -5.7
Media -5.9
Electronic & Electrical Equipment -6.1
Personal Goods -6.2
Banks -8.8
General Industrials -8.8
Aerospace & Defense -9.3
Mobile Telecommunications -10.3
Food & Drug Retailers -11.0
Industrial Metals -24.7

 

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First trading day of April

Tomorrow will be the first trading day (FTD) of April.

As explained in the 2014 edition of the Almanac, the market has a tendency to be strong on the FTD of a month. And this effect has been even more pronounced in recent years.

Since 1984, the FTSE 100 Index has a return average of 0.5% on the April FTD, which makes it the second strongest FTD of the year. The index has risen on the April FTD every year since 2003. Since 2000 the April FTD average return has been even higher at 0.82%.

The following chart shows the returns for every April FTD since 1984.

First trading day of April  (1984-2013) [2014]a

 

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Last trading day of March

Next Monday will be the last trading day (LTD) of March.

As explained in the 2014 edition of the Almanac the LTDs of months used to be stronger than average, but in recent years they have been weak.

Since 1984 the index average return on the March LTD has been 0.12%. Since 2000 the index average return on this day is 0.27% (of course, this figure is skewed by the huge 4% rise in the index on the LTD of March in 2009).

The following chart shows the FTSE 100 Index returns for every March LTD since 1984.
Last trading day of March  (1984-2013) [2014]

 

 

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Index changes (FTSE indices) – paper review

Every quarter the constituents of the FTSE 100 Index are reviewed, some companies may be removed to be replaced by others. An effect has been observed whereby companies joining the FTSE 100 Index experience a positive and permanent impact on their share prices.

This article presents a brief review and listing of academic papers on changes made to FTSE indices.


Traders are interested in changes to equity indices due to the potential arbitrage profits; but academics have a wider interest because for them changes to indices act as something like a laboratory for testing theories of stock market efficiency and behavioural finance. Briefly, when a stock joins (or leaves) an index, nothing changes to the company itself and so (in an efficient market) there should be no change to the share price. Academics therefore get excited (the term is used here relatively loosely) when this is not the case.

Comovement

Kougoulis and Coakley (2004) found that shares joining the FTSE 100 Index experienced an increase in comovement (price movement correlation with other shares); shares leaving the index experienced the opposite effect. Mase (2008) supported the previous findings and in addition found that increases in comovement had become larger in recent years, and that the overall increase in comovement was due to new additions to the index rather than previous FTSE 100 constituents re-joining the index.

Price pressures

Another favourite of academics. If a share price moves without new information is the move temporary (price pressure hypothesis) or permanent (imperfect substitutes hypothesis)? Mazouz and Saadouni (2007) found strong evidence for the price pressure hypothesis: prices increased (decreased) gradually starting before the index change announcement date of inclusion (exclusion) and then reversed completely in less than two weeks after the index change date. The existence of the temporary price changes (price pressure hypothesis) was also found by Opong and Antonios Siganos (2013) and Biktimirov and Li (2014). Interestingly, Mase (2007) comments that the temporary prices changes to shares joining/leaving the FTSE 100 Index is in contrast to the case for S&P 500 index changes where permanent price changes have been found.

Information efficiency

Daya and Mazouz and Freeman (2012) (and other papers) found that informational efficiency improved for stocks added to the FTSE 100, but did not diminish after deletion.

Now, onto the more useful topics.

Price changes

Gregoriou and Ioannidis (2006) found that price and trading volumes of newly listed firms increased. That confirms what we already knew or suspected. But, interestingly, they (and other papers here) attribute the cause to information efficiency: stocks with more available information increase investor awareness. However, Mase (2007) does say that investor awareness and monitoring due to index membership do not explain the price effects. But not mentioned here is the influence of index funds.

And, finally, the interesting stuff.

Anticipatory trading

Fernandes and Mergulhao (2011) found that a trading strategy based on addition/deletion probability estimates gave an average daily excess return of 11 basis points over the FTSE 100 index. Opong and Siganos (2013) found “significant net profitability” from an investment strategy based on firms on the FTSE reserved list. And a strategy based on the FTSE 100 quarterly revisions was profitable if CFDs were used and traders could deal within the bid/ask spread.


INDEX (of papers listed below)

[Papers listed in reverse date order; indicates major paper.]

  1. Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index [2014]
  2. Compositional changes in the FTSE 100 index from the standpoint of an arbitrageur [2013]
  3. Information efficiency changes following FTSE 100 index revisions [2012]
  4. Anticipatory Effects in the FTSE 100 Index Revisions [2011]
  5. Comovement in the FTSE 100 Index [2008]
  6. The Impact of Changes in the FTSE 100 Index [2007]
  7. The price effects of FTSE 100 index revision: what drives the long-term abnormal return reversal? [2007]
  8. New evidence on the price and liquidity effects of the FTSE 100 index revisions [2007]
  9. Investor awareness and the long-term impact of FTSE 100 index redefinitions [2006]
  10. Information costs and liquidity effects from changes in the FTSE 100 list [2006]
  11. Comovement and Changes to the FTSE 100 Index [2004]


Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index
Authors [Year]: Ernest N. Biktimirov and Boya Li [2014]
Journal [Citations]: Review of Quantitative Finance and Accounting, 42(1), pp95-122
Abstract: We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses.
Ref: AA704

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Market behaviour on the days around Budget Day

The United Kingdom Budget Day used to be in April, after the start of the fiscal year, but these days it is in March, before the end of the fiscal year. The Chancellor of the Exchequer will give his Budget to Parliament this Wednesday, 19 March 2014.

The following charts show the daily returns since 2000 for three asset classes for the three days around Budget Day:

  1. B(-1): the day before the Budget
  2. B(0): Budget Day
  3. B(+1): the day after the Budget

Equities

For example, in year 2000 the Budget was on 21 March, the day before the Budget the FTSE 100 rose 1.04%, on Budget Day the index fell 0.13%, and on the day after the index fell 0.12%.

Daily returns for FTSE 100 for the three days around the Chancellor's Budget (2000-2013)Currency

Daily returns for GBPUSD for the three days around the Chancellor's Budget (2000-2013)Gilts

Daily returns for 8pc Treasury 2021 for the three days around the Chancellor's Budget (2000-2013)Summary

The following two charts give a summary for the three asset classes.

Average returns for three asset classes for the three days around Chancellor's Budget (2000-2013)

Positive returns for three asset classes for the three days around Chancellor's Budget (2000-2013)On average since 2000 the equity market has seen mildly positive daily returns on the day before the Budget and on Budget Day itself. But the most significant observation is that equities have been weak on the day after the budget – since 2000 the market has only risen on three days after the Budget.

Sterling seems to like the Budget, on average GBPUSD has risen for all three days.

Gilts have been weak for all three days, with the weakest day being the day after the Budget.

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FTSE 100 Index changes – effect on share price of companies leaving the index

FTSE 100 Index quarterly reviews

The following charts show the share price of six companies that have left the FTSE 100 Index (in the years 2012-2013). The time period for each chart is six months, starting from three months before the company left the index. The dashed vertical line shows the date it was announced the company was leaving the index.

So the charts show the share price behaviour in the three months leading up to leaving, and the three months after.

Review changes are implemented at close on the third Friday of the month of the review. (Further information on the FTSE 100 Index quarterly reviews.)

The effect is not as strong as that for companies joining the index, but generally share prices fall (sometimes quite steeply) in the three months leading up to the index change announcement, and then shares bounce back quite sharply immediately afterwards.

FTSE 100 Index change - company leaving index (LMI)
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FTSE 100 Index changes – effect on share price of companies joining the index

FTSE 100 Index quarterly reviews

The following charts show the share price of six companies that have joined the FTSE 100 Index (in the years 2012-2013). The time period for each chart is six months, starting from three months before the company joined the index. The dashed vertical line shows the date it was announced the company was joining the index.

So the charts show the share price behaviour in the three months leading up to joining, and the three months after.

Review changes are implemented at close on the third Friday of the month of the review. (Further information on the FTSE 100 Index quarterly reviews.)

It is quite common that share prices rise immediately before a company joins the FTSE 100 Index. While immediately afterwards the price is usually flat or falls back. This effect can be seen in the following charts.

FTSE 100 Index change - company joining index (CRDA)
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