The turn-of-the-month effect and trading of types of investors

Abstract

We examine the turn-of-the-month (TOM) effect in the Korean stock market, a representative emerging market in Asia. The returns show that the TOM effect is statistically significant and is not due to size or turn-of-the-year, turn-of-the-quarter, or index rebalancing effects. Although extant studies explain this effect as the result of individual investors' increased liquidity and institutional window-dressing, we find that individual and institutional traders do not trade and buy more stocks at the TOM than they do in the rest of the month (ROM). Moreover, the stocks that individual traders buy relatively more tend to underperform. On the other hand, foreign investors trade and buy more stocks at the TOM than they do in the ROM, and the stocks they buy more at the TOM tend to outperform. Therefore, foreign investors partially contribute to the TOM effect in the Korean market.