It's usual for employers to give their workers a present for the Jewish holidays. It turns out, based on a study by Haim Levy and Guy Kaplanski, soon to be published in the journal Quantitative Finance, that the Tel Aviv Stock Exchange has also been generous.
The study looks at the average returns of the Tel Aviv-25 index on the last trading day before holidays from 1990. It found the average return was five times the average daily TA-25 return.
For the purposes of the study, the holidays were defined as the 10 days of the year in which the TASE is closed: Rosh Hashanah, Yom Kippur, the first and last day of Sukkot, Purim, the first and last day of Passover, Independence Day, Shavuot and Tisha B'Av. On each of the last trading days before these holidays, returns on the TA-25 were higher than the average daily return.
Around the world, the standard explanation for stock market upturns before a holiday is that the holiday cheer diminishes the sense of risk. Investors in a jolly mood tend to over-value shares.
"Yom Kippur is a different story," Levy says. "On the last trading day before Yom Kippur, returns go up as with other holidays, but one and two days afterward, the average return is negative and goes down as much as 1%." Anyone who thinks this is because of the somber religious significance of the Day of Repentance would be wrong. Levy and Kaplanski believe the reason for the market decline is the trauma of the 1973 Yom Kippur War, which is still deeply etched in the Israeli memory.
"The evening television broadcast schedule at the conclusion of Yom Kippur is devoted largely to the story of the war and the memory of the many killed in that conflict. On the eve of the holiday, there are also many memorial ceremonies, and all this creates an atmosphere of gloom that affects the stock market, too," Levy says.
To confirm this explanation, the pair of researchers examined the stock exchange's performance the day after Yom Kippur in the years prior to the war. "Our hypothesis was that before the war, there was no such effect. We looked at 1967 to 1972 and found that, in fact, the after effect of Yom Kippur did not exist, and the average daily return the day after Yom Kippur was positive and higher than the daily average, comparable to the holiday effect of Sukkot, " Levy says.
The Yom Kippur effect
Consistent with the assumption that the war made the difference, the researchers expected that as the years went by, the effect would diminish as memories of 1973 receded, as the group of investors who didn't go through the war grew and as the public's involvement with mourning the war lessened. In fact, over the past decade, the data shows that the war's impact on the trading day after Yom Kippur has diminished in recent years.
The Yom Kippur effect has lasted until Sukkot because of the calendar proximity of the holidays, meaning that the average returns on the last trading day before Sukkot has been lower than on the day before other holidays. When the researchers corrected for the negative effects of Yom Kippur on trading just before Sukkot, they found that the holiday gift that investors get the day before the other holidays is even greater. It was 14 times the TA-25 daily return on an average trading day, or 0.7% compared to the usual 0.05%.
Levy, who is dean of the business management school at the Academic Center of Law and Business in Ramat Gan, and Kaplanski, a lecturer at Bar-Ilan University, have been active in studying the influence on the markets of factors that on the surface seem unrelated to market behavior. Another study they conducted showed that markets around the world reacted negatively the day after World Cup soccer matches. The study caused such a stir that the Royal Bank of Scotland came out with a financial tool enabling investors to sell stock indexes short on days before the matches, meaning they could bet against the market.
The pair of researchers believe the very fact that these effects on the markets are being publicized could lead to their disappearance over time. Levy notes that the effect of the weekend on the U.S. markets was pointed out as early as 1973, showing that markets declined on Mondays, particularly when compared to higher than average returns on Fridays. Hedge funds were even set up in the United States to take advantage of the phenomenon, but this resulted in the disappearance of the trend over the past 15 years.
"Classic finance theory," Levy says, "is based on the rationality of investors. The economists believed the market was efficient, but 20 years ago, recognition of irrational factors on investor decisions began to be recognized, and these are things it is hard to teach at schools of finance."
In April, Levy and Kaplanski published an article in the "Journal of Financial Economics" that showed that when a Western airliner crashes, the New York Stock Exchange declines 1.7% on average on the two days following the accident, wiping out $60 billion in the value of stocks.
"What is the financial damage caused by an airplane crash? Not more than $1 billion, but the [market's response] magnifies the amount by a factor of 60," Kaplanski says. He and Levy note that the effect is temporary with an upward correction generally coming on the third day of trade. The negative effect on the New York exchange is limited to crashes by Western airliners. The researchers say it doesn't apply, for example, when an African plane goes down, which the pair attributes to less news coverage in such cases.
In addition to Israel and the United States, the effect of holidays is felt on other stock exchanges around the world, including those in Japan, Spain, Hong Kong, Canada, Australia and the United Kingdom. Local holidays, Levy says, affect all of these exchanges, except Hong Kong, where the influence of foreign investors is especially great.
Despite publicity surrounding the phenomenon, it has not disappeared. "That really amazes me," Levy says. "We anticipated that a sophisticated and efficient capital market like that in the United States would suppress such an anomaly, but it hasn't happened."
Nonetheless, Levy and Kaplanski warn against an investment strategy based on rising shares before holidays, as it's possible for stocks to actually fall by 20% on one of those days and wipe out years of gains.
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