We’ve discussed return seasonalities in the past, especially as they pertain to our approach to momentum. Turns out seasonality effects aren’t confined to momentum — they are literally everywhere and they are incredibly strong.
This paper will blow your mind once you let the results settle in a bit.
Turns out stock returns are lumpy across the calendar. Stocks don’t earn “average” returns each month, they earn a lot of return in some months and little to no returns in other months…and this pattern is predictable, persistent, and powerful.
Here is an image from the authors the explains the basic idea:
A strategy that selects stocks based on their historical same-calendar-month returns earns an average return of 13% per year. We document similar return seasonalities in anomalies, commodities, international stock market indices, and at the daily frequency. The seasonalities overwhelm unconditional differences in expected returns…
Instead of focusing on particular characteristics to form portfolios (cheap, high mom, low vol, quality, etc.) one can simply form portfolios based on their performance during a particular month.
Here are their bottomline results:
Interesting, to say the least…more to come on this subject. The R&D engines will be roaring this summer.
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