Turn of the Month effect in the New Zealand stock market

ABSTRACT

We examine the Turn of the Month effect in the New Zealand stock market and find that returns on the last three days of the calendar month are, on average, positive and significantly higher than on other days of the month. This Turn of the Month effect is robust to various stock characteristics, such as company size, trading activity, year- and firm-level fixed effects, and is robust over time, i.e. before and after the Global Financial Crisis. We examine various explanations for the Turn of the Month effect, such as dividend payments, price pressures, and window dressing, but none of these explain the observed Turn of the Month effect. Hence, this effect remains a puzzle that can potentially be exploited in a trading strategy.

KEYWORDS:

• Market anomaly
• market efficiency
• New Zealand

JEL CODE:

• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. One of the earlier rigorous efforts was by Charles Dow (1857–1902), whose Dow theory laid the foundation for technical analysis.

2. Admittedly, transaction costs would reduce profitability of the strategy, but it could be exploited by timing share purchases and sales keeping this pattern in mind.

3. The starting date is based on availability of the NZX50 index data in DataStream.

4. If trade price is higher than the previous price, the trade indicator takes a value of 1. If trade price is lower than the previous price, the trade indicator takes a value of −1. If trade price equals the previous price, we assign a value of 0.

5. The Sharpe ratio is defined as the stock return in excess of the risk-free rate, divided by the standard deviation of returns, and as such provides a measure of the return obtained for taking on risk.

6. However, for such a strategy to work, we would need to account for trading costs (brokerage, bid-ask spread and market impact). The results we document in this study are before we factor in those costs.

7. We tested alternative TOM windows, ranging from [T − 3, T − 1] to [T − 3, T + 5], and find that the returns from the TOM strategy is largest for the [T − 3, T − 1] window.

8. We also conduct our analysis using all NZ-listed stock and confirm that the results reported in this paper hold. These results are available on request.

9. We document a positive size effect in the NZ market, suggesting that larger stocks generate higher returns. This positive size effect contradicts US evidence that shows that small cap stocks command a risk premium, but is in line with evidence of the size effect in the New Zealand market, which has been shown to be negative (see e.g. Frijns & Tourani-Rad, 2015; Frijns & Indriawan, 2018).

10. We also estimate Equation (2) for various alternative TOM windows ranging from [T − 3, T − 1] to [T − 3, T + 5], and find that the TOM effect is strongest for the [T − 3, T − 1] window.

11. Prior to conducting the regression analysis, we test whether dividend is indeed paid towards the end of the month. We examine the frequency of dividend distribution over different days of the month (see Figure A1 in the Appendix), and find that dividend payments occur more in the second half of the calendar month.

12. We also conduct analyses using dividend-price ratio and find that the results are identical to those reported in this paper. These results are reported in the Appendix.

13. We also investigate whether the window dressing activity of institutional investors causes a price pressure which can then lead to the Turn of the Month effect. We do this by considering three-way interaction effects between our measures of order imbalance, institutional holdings and the TOM dummy, and find that these three-way interaction terms are insignificant, showing that we find no evidence for this channel.