Buy in May and Sell on St. Leger Day? The Reversal Halloween Effect in QMJ

Abstract

Quality-minus-junk (QMJ) is a long-short factor that captures the time varying premium of high quality assets. The long side (Quality) is stocks with high quality and the short side (Junk) is stocks with low quality. In this paper, we find that both Quality and Junk have a significant Halloween effect: the portfolios have a relatively better performance during winter as compared with summer. In terms of the magnitude of Halloween effect, Junk is greater than Quality. As a result, the long-short QMJ factor exhibits a pattern of reversal Halloween effect and this result is robust under different study samples. In addition, we also find that the Halloween effect of the stock market (MKT) can be largely explained by its negative exposure on QMJ. After controlling for QMJ, the magnitude of Halloween effect for MKT diminishes more than 60%.

Keywords: Halloween effect; Quality-minus-junk; Seasonality; Stock market

JEL Classification: G14; G15