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Seasonal Anomalies - Theory review

Seasonal Anomalies Jun 30, 2023

A Seasonal Anomaly (or Calendar Anomaly) is a behavior of a financial market that contradicts the Efficient Market Hypotesis (EMH). Since 1990, the theories of Behavioral Finance have been explaining the reason for the presence of Anomalies.

Efficient Market Hypotesis theory

According to Efficient Market Hypotesis:

  • The operators are perfectly rational, and their behavior can be represented by the model of maximization of expected utility.
  • Historical price data is already priced in and cannot be used to make profits. Technical Analysis (TA) and Time Series Analysis (TSA) do not work.
  • It should not be possible to find elements of regularity in the behavior of financial assets, and financial assets follow paths of pure randomness.
  • If elements of statistical regularity are found, the action of the arbitrageurs should lead in a short time to eliminate them, making it impossible to benefit in terms of profits.

So, according to the EMH theory, it would not possible to identify and profit from a specific period of a financial market because every period should be equal to all other one.

Behavioral Finance theory

From 1990's there has been a rise in the importance of the Behavioral Finance theories, that oppose to the EMH and random walk theories. According to Behavioral Finance:

  • The model of maximization of expected utility, fails to correctly portray the real behavior of economic operators. Operators are not perfectly rational, because are conditioned or rather limited in making perfectly rational decisions by the interaction of several disturbing factors (limited time, too complex problems, etc.)
  • The 2002 Nobel Prize for economics Daniel Kahneman is the definitive affirmation of the discipline and the acceptance of the presence of "anomalies“ in the behavior of financial markets, attributable to the absence of perfect rationality in making investment decisions and the inability of market prices to react instantly to the dissemination of new information.

Anomalies in Literature

There are different families of 'Market Anomalies':

  • Anomalies related to fundamentals (PE, DY, PBV).
  • Anomalies linked to past-price performance or ‘technical anomalies’ (momentum/trend following)
  • Anomalies attributable to seasonality:
    • Calendar anomalies: anomalies linked to specific calendar days or periods
    • Weather related anomalies: anomalies linked to climate.

Additional concepts linked to anomalies:

  • Not all the anomalies are profitable: once the existence of an anomaly has been verified, it is necessary to analyze whether it can be exploited to set arbitrage strategies, aimed at profiting from the presence of such irregularities, by deducting trading costs.
  • An anomaly is better if there is a reason behind it. And a trader / investor who trade an anomaly should understand the underlying causes and monitor them, to adapt to any changes.
  • It would be better to integrate calendar anomalies to other indicators, for example with the expansions / recession's phases of economy and the phase of the long-term Kondratieff cycle.

Two explanation about the causes of the anomalies:

  • Change in human mood and then in propension to risk due to event such as a holiday.
  • The irregularity of the capital inflows and outflows in a market, for example due to the timing of monthly cash flows received by pension funds, which are reinvested in the stock market.


Andrea Ferrari

I deal with Programming and Finance, I lead the R&D of ForecastCycles. I strongly believe that Seasonality, COT and Macro and Fundamental analysis are the basis for Trading and Investments.