Looking at the turn of the month effect in equity indices

After reading papers about the consistency of the turn of the month effect (Lakonishok and Schmidt (1988), Xu and McConnell (2006)) and hearing about its success from several trader friends (it’s been covered several times in the blogosphere too, e.g. at MarketSci) I decided to explore it a bit.

Basically, returns at the turn of every month (last day of current month, through the 3rd day of the next month) are positive and significantly different from market returns.

Below is a PDF detailing my findings/research replication, tables and graphs included. All the analysis was done during my free time over the summer and I just got around to writing it up. I decided to do the writeup in Latex because I think Latex documents are pretty. LyX, the latex wysiwyg processor, was used.

To test the profitability of the turn of the month effect in real time, four months ago I started trading a strategy that I developed based on the effect. The strategy enters two new positions at the beginning of every month and gets out a few days later. I have only entered six positions so far (five have been profitable), two are missing because I decided not to enter any positions at the end of July due to the debt ceiling debate (good thing too because both positions would’ve been losers).

Here’s the writeup:

An exploration: the turn of the month effect in equities from 1926 through 2010