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Are return seasonalities due to risk or mispricing?

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  • Keloharju, Matti
  • Linnainmaa, Juhani T.
  • Nyberg, Peter

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.

Suggested Citation

  • Keloharju, Matti & Linnainmaa, Juhani T. & Nyberg, Peter, 2021. "Are return seasonalities due to risk or mispricing?," Journal of Financial Economics, Elsevier, vol. 139(1), pages 138-161.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:1:p:138-161
    DOI: 10.1016/j.jfineco.2020.07.009
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    4. Meng, Chen & Du, Qingjie & Shu, Haibing, 2024. "Return seasonalities in the Chinese stock market," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).
    5. Su, Xuan-Qi, 2023. "Directors' and Officers' liability insurance and cross section of expected stock returns: A mispricing explanation," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    6. Lucy F. Ackert & George Athanassakos, 2021. "Gamesmanship and Seasonality in U.S. Stock Returns," JRFM, MDPI, vol. 14(5), pages 1-11, May.
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    8. Mercik, Aleksander & Cupriak, Daniel & Zaremba, Adam, 2023. "Factor seasonalities: International and further evidence," Finance Research Letters, Elsevier, vol. 58(PA).
    9. Ai He & Guofu Zhou, 2023. "Diagnostics for asset pricing models," Financial Management, Financial Management Association International, vol. 52(4), pages 617-642, December.
    10. Arbab Khalid Cheema & Wenjie Ding & Qingwei Wang, 2023. "The cross-section of January effect," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 513-530, October.
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    More about this item

    Keywords

    Cross-sectional seasonalities; Reversals; Risk; Mispricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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