The Two-Year Effect

30 Pages Posted: 25 Aug 2008 Last revised: 13 Jan 2009

Date Written: December 2008


This paper identifies a puzzling form of predictability in U.S. stock market portfolios. For the value weighted market index, those years that follow a low return two years earlier have an average return 11.6% higher than those years that follow a high return two years earlier. The difference in returns is economically and statistically significant. This Two-Year Effect is not concentrated in January, nor is it a small-cap effect. The phenomenon cannot be explained by macroeconomic business cycle variables related to expected returns, or by the four-year U.S. presidential election cycle.

Keywords: Mean reversion, Predictability, Asset pricing

JEL Classification: JEL classification: G10, G11, G12, G14

Suggested Citation

Bornholt, Graham N., The Two-Year Effect (December 2008). 21st Australasian Finance and Banking Conference 2008 Paper, Available at SSRN: or

Graham N. Bornholt (Contact Author)

Griffith University ( email )

Gold Coast Campus
Gold Coast QLD, 4222

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