Drivers of seasonal return patterns in German stocks

Michael Weigerding,Michael Hanke

doi:10.1007/s40685-017-0060-0

Abstract

Using a data set of German stocks that includes the financial crisis, this paper identifies market liquidity as the main driver of return seasonality. In comparison, the economic significance of order flow imbalance is markedly weaker. Applying panel regressions and controlling for unobserved effects, we investigate the effects of both variables simultaneously, together with dummies for calendar effects. US macroeconomic news announcements, which have been identified as one driver of return seasonality in previous studies using non-US data, are of little importance for our data set of German stocks.

Highlights

More than four decades ago, Fama (1970) published his seminal paper on efficient capital markets
Using a data set of German stocks that includes the financial crisis, this paper identifies market liquidity as the main driver of return seasonality
We found that market liquidity has the strongest influence on return patterns: we use daily data, we find that the variation in bid-ask spreads and the Amihud (2002) ratio accounts for a sizeable proportion of return seasonality

Summary

Introduction

More than four decades ago, Fama (1970) published his seminal paper on efficient capital markets. Years since described systematic deviations from the Efficient Markets Hypothesis, often referred to as anomalies Whereas many such anomalies vanished shortly after their publication, others still persist (for an overview, see Zacks 2011). Business Research (2018) 11:173–196 seasonal patterns with stock returns on specific days being systematically higher/ lower than those on other days (e.g., the so-called turn-of-the-month effect) show remarkable persistence over time. This type of seasonality in returns is welldocumented for several countries, and it has been existing for more than 20 years (Liu 2013). The literature considered three main potential reasons for return seasonality: order flow (or order imbalance), market liquidity, and announcements of macroeconomic news (see, e.g., Zwergel 2010)

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