Moon shines new light on Asian markets

Dr Rakesh Gupta
Dr Rakesh Gupta

Where often it has inspired poets and philosophers to great words and deeds, the moon may now be inspiring modern investors to greater profits.

New research on Asian stock markets suggests a ‘holiday effect’ is at work in countries like China, Japan and Hong Kong, yielding increased returns for stocks bought immediately before the Chinese Lunar New Year.

The results of the study, carried out by Dr Rakesh Gupta and Tian Yuan, have been published in the Quarterly Review of Economics and Finance.

“The holiday effect is a well-documented calendar effect in stock markets, suggesting stock returns on the days preceding holidays tend to be abnormally higher than those for other trading days,” Dr Gupta said.

“It is a seasonal pattern that seems to challenge an established market hypothesis which claims changes in stock prices ought to be unpredictable based on their past values. Our findings suggest the moon may be as much an inspiration for global investors as it once was for world-renowned figures like William Butler Yeats and Emily Bronte.”

The paper uses a sophisticated model to investigate the stock returns before and after the Chinese Lunar New Year across seven major Asian stock markets – China, Hong Kong, Japan, Malaysia, Singapore, South Korea and Taiwan — during a 13-year period.

Chinese influence

These nations are either historically influenced by Chinese culture or have a relatively large proportion of Chinese population. India, which is not influenced by Chinese culture in the same way, was also tested to confirm the robustness of the study.

“The Lunar New Year falls on a different date each year and is the most important traditional festival in China. The findings imply that a cultural factor does matter for stock pricing,” Dr Gupta said.

“This has implications for understanding market efficiency in emerging markets, and for practitioners who invest in emerging markets. The study is also of import for investors, fund managers and policy makers. Investors may be able to capture superior returns by taking active trading strategies based on this effect.

“Given the significant economic performance of Asia, an increasing number of global investors have taken an interest in Asian equity markets.”

Daily stock index returns for each market were analysed from September 1999 to March 2012 revealing a significantly positive pre-Lunar New Year holiday effect for all cases, with one interesting caveat in the case of China.

“High returns for China are rewards for high risk,” Dr Gupta explains, “whereas for the other markets, high returns are caused by unknown factors that can be attributed to investor euphoria around the Lunar New Year. In China, a short-term investment objective around the Lunar New Year points to activity by noise traders or speculators.”

  • Read the full paper “Chinese Lunar New Year Effect in Asian Stock Markets, 1999-2012” here.