Closing the Question on the Continuation of Turn-of-the-Month Effects: Evidence from the S&P 500 Index Futures Contract

Edwin D. Maberly and Daniel F. Waggoner
Federal Reserve Bank of Atlanta
Working Paper 2000-11
August 2000

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Prior research documents unusually high returns on the last trading day of the month and over the next three consecutive trading days. This phenomenon is known as the turn-of-the-month (TOTM) effect. According to Siegel (1998), why these anomalies occur is not well understood, and whether they will continue to be significant in the future is an open question. In this paper, we examine the S&P 500 futures contract for evidence that turn-of-the-month effects have continued. Transaction costs are low for index futures, and the absence of short-sale restrictions makes index futures an attractive venue for testing the continuation of market anomalies because of the low cost of arbitrage. We find that TOTM effects for S&P 500 futures disappear after 1990, and this result carries over to the S&P 500 spot market. We conjecture that a change in the preference of individual investors over time from making direct to making indirect stock purchases through mutual funds is related to the disappearance of the TOTM effect for more recent return data. In this paper, we argue that turn-of-the-month return patterns for both spot and futures prices are dynamic and related to market microstructure and therefore subject to change without notice. Financial economists should be careful when making out-of-sample inferences from observed in-sample return regularities.

JEL classification: G14

Key words: disappearing turn-of-the-month effect, S&P 500 futures, market efficiency

This paper was completed while Maberly was a visiting scholar at the Federal Reserve Bank of Atlanta. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Edwin D. Maberly, Professor of Finance, Department of Accountancy, Finance and Information Systems, University of Canterbury, Private Bag 4800, Christchurch, New Zealand, or Daniel F. Waggoner, Economist, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303-2713, 404-498-8278,