Why investors should not be cautious about the academic approach to testing for stock market anomalies

Brian Lucey and Angel Pardo

Applied Financial Economics, 2005, vol. 15, issue 3, 165-171

Abstract: The ability of investors to implement seasonal strategies implied by academic papers has been widely criticized, most recently by Hudson et al. (Applied Financial Economics, 12, 681-86, 2002). This paper addresses these concerns, and provides an example of a strategy derived from academic papers that indicates how and to what profitability such a strategy can be implemented. In particular, the pre-holiday anomaly is examined, where returns tend to be higher on the day before a holiday. After checking that the pre-holiday return compensates market frictions, the existence and the changing nature of such anomaly is tested. Finally, the profitability of the pre-holiday trading strategy in an out-of-the-sample period is assessed by checking that the pre-holiday profit is clearly different from the result an investor would obtain on a set of randomly selected days. This evidence is provided for three large stocks and an index in two different markets, Spain and Ireland.

Date: 2005
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DOI: 10.1080/0960310042000313213

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