Seasonality of Stock Market Returns FINA 3312: Financial Markets and Institutions Section: 201 Sarah Sultan – 201000073 Lulu Al-Fayaheen - 200600515 Fatimah Al-Shawaf - 200801492

Introduction At times, the stock market may face some seasonal variations, which would directly affect the investors’ willingness to continue their relationship with the company they have funded. When stock prices drop, the returns will also decrease which would affect the issuer of the shares as well as the investors in a negative manner.

Efficient Market Hypothesis This hypothesis states that the market prices of assets should always be equal to the projected or estimated values, because all the information needed for investors is present. In an efficient market the prices of stock should always be correct as well as reflect market fundamentals. theory suggests that at all times the shares that are being traded are always at a fair value and that it is impossible for an investor to buy an undervalued stock or even sell a stock that has an inflated price range.

Seasonality Seasonality is the short term, irregular variances that occur over the course of a year. Whether it’s a change due to the month of year or even due to a holiday or announcement, these changes can definitely affect the returns on the stock market.

Seasonal Irregularities January Effect Holiday Effect Announcements Effect Turn-of-the-Month Effect Small-Firm Effect Weekend Effect

Small firm effect Known as the “white cap effect”. Smaller firms or companies that have little market capitalization tend to do better than larger firms. It has not yet been proven the reasoning behind why at times smaller firms outperform larger firms. However, many financial analysts believe it is all about the risk a firm is willing to take.

Turn of the Month Effect This effects suggests that there would be a temporary incline of stock prices. The increase of stock prices usually occurs around the last days and the first few days of the given month.

Weekend effect Since the early 1980s. Traders in the stock market have realized that the securities have a tendency to perform very highly on Fridays. This trend suggests that there is a downward average of stock market returns from Friday to Monday.

Holiday effect “The higher returns around holidays, mainly in the pre- holiday period as compared to returns of the normal trading days”

Announcements effect A seasonal effect can happen due to announcement, can be done by linking earnings announcements to liquidity effects, which should show that earnings that lead to liquidity shocks. Many studies show that around any sounding announcement the bid-ask spreads becomes wider, and trading volumes fluctuates in a drastic way.

Various Months Cycles December January July

Last Few Trading Days of the Month Generally speaking, the first and the last few trading days of the month are usually lousy days for the stock market players because they are open for seasonal stock market trends.

Conclusion In conclusion, the stock market as a whole does not perform perfectly efficient at all times of the year. There are many expected patterns of variation in the pricings of stocks due to several seasonal irregularities. The stock market returns can vary from time to time, depending on the several anomalies that were spoken about previously

References Weekend Effect. (n.d.). Retrieved December 16, 2012, from Investpedia: http://businessinnovation.berkeley.edu/WilliamsonSeminar/hamilton041609.pdf Elfenbein, D. (n.d.). The Small Firm Effect . Retrieved December 10, 2012, from Berkley: Seasonal Stock Market Trends. (n.d.). Retrieved December 4, 2012, from Wiley: http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0470270438.html Stock Market. (n.d.). Retrieved December 5, 2012, from Investopedia: http://financial- dictionary.thefreedictionary.com/Stock+market+returns Stock Market Cycles. (n.d.). Retrieved December 12, 2012, from Stock Screening 101: http://www.stockscreening101.com/stock-market-cycles-seasonal.html Stock Market Returns. (n.d.). Retrieved December 4, 2012, from Financial-Dictionary: http://financial-dictionary.thefreedictionary.com/Stock+market+returns

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