Abstract
Stocks tend to earn high or low returns relative to other stocks every year in the same month (Heston and Sadka, 2008). We show these seasonalities are balanced out by seasonal reversals: a stock that has a high expected return relative to other stocks in one month has a low expected return relative to other stocks in the other months. The seasonalities and seasonal reversals add up to zero over the calendar year, which is consistent with seasonalities being driven by temporary mispricing. Seasonal reversals are economically large and statistically highly significant, and they resemble, but are distinct from, long-term reversals.
| Original language | English |
|---|---|
| Pages (from-to) | 138-161 |
| Number of pages | 24 |
| Journal | Journal of Financial Economics |
| Volume | 139 |
| Issue number | 1 |
| Early online date | 15 Jul 2020 |
| DOIs | |
| Publication status | Published - Jan 2021 |
| MoE publication type | A1 Journal article-refereed |
Funding
We thank Chris Hrdlicka, Mark Kamstra, Owen Lamont, Jon Lewellen, an anonymous referee, and the seminar and conference participants at the Australian National University, Chinese University of Hong Kong, City University of Hong Kong, Hong Kong Polytechnic University, Nanyang Technological University, National University of Singapore, Singapore Management University, University of New South Wales, University of Technology Sydney, 2018 Citi Quant Research Conference, and 2019 Chicago Quantitative Alliance Conference for insightful comments. Financial support from the Academy of Finland, Inquire Europe, and Nasdaq Nordic Foundation is gratefully acknowledged.
Keywords
- Cross-sectional seasonalities
- Mispricing
- Reversals
- Risk
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