Turn-of-the-month effect: New evidence from an emerging stock market

This paper analyzes the turn-of-the-month (ToM) effect in Turkish equity returns. We show that the ToM effect is strongly significant in BIST100 index over 1988–2014, and distinct from other calendar anomalies. In particular, the mean daily index return is 0.46% in the three-day period that covers the last trading day of each month and the first two trading days of the next month, and 0.09% in the remaining days. The ToM effect is more significant following months with (a) significant information flow and (b) above average market performance, and the fraction of index returns generated within the ToM period increases secularly from 39% over 1988–1996 to 49% over 1997–2005 and to 86% over 2006–2014. A similar month-end seasonal does not exist in index trading volume or realized volatility, ruling out standard liquidity or risk-based explanations. Estimating an e-GARCH model with daily index returns, however, we link the ToM effect to a decline in expected volatility in the days leading to month-turns. These findings resonate best with a story where gradual resolution of uncertainty following high information risk periods releases a large pool of “liquid funds” accumulated during such periods into the equity market, creating an abundance of liquidity and pushing equity prices up.