The Monthly Effect in Stock Returns and Conditional Heteroscedasticity
American Economist › Vol. 48 Nbr. 2, October 2004
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Summary
This paper analyzes the end-of-month (or monthly) effect in stock returns using a conditional GARCH variance model. Many researchers who have studied seasonal anomalies in stock returns have tried to explain these phenomena by looking at the stock market in isolation. In this paper, we relate the end-of-month effect to macroeconomic variables. Furthermore, we improve the efficiency of our statistical tests by including heteroscedasticity in the model. As a result, we present evidence that there is indeed an end-of-month effect distinct from the Mondays in the end-of-month effect documented by previous researchers. We show a link between this end-of-month effect and the economic business cycle, and present evidence that the end-of-month anomaly exists only during business cycle expansions; this anomaly disappears during business cycle contractions.
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The Monthly Effect in Stock Returns and Conditional Heteroscedasticity
I. Introduction
Various seasonal anomalies in stock returns have been researched since Rozeff and Kinney (1976) originally presented the January effect.1 For example, French (1980) documented the weekend (or Monday) effect,2 and Ariel (1987) presented the end-of-month (or monthly) effect. In addition, documentation of similar phenomena by Lakonishok and Smidt (1988) using a longer time series and by Jaffe and Westerfield (1985) in foreign equity markets has reduced the possibility that these anomalies are due to sampling error.In this paper, we present a possible structural explanation for Ariel's end-of-month effect. Ariel (1987)...See the full content of this document
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