Seasonality in outliers of daily stock returns: A tail that wags the dog?
We document significant intra-year seasonality in outliers of S&P500 daily rates of return. Controlling for outliers in dummy regressions reveals that both the January and Monday effects turn from insignificant to highly significant. Mean daily return on January doubles and becomes significantly higher than all other months of the year, and Monday's mean return turns significantly positive and higher than other days of the week. The recently documented Halloween effect turns significant only after controlling for outliers as June, August, and September turn out to be months with remarkably low rates of returns. Being random, outliers cannot serve as instrumental variables for designing trading rules, yet, their impact on options pricing through the increase in volatility, may be applied for profitable options strategies.
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