Investors look to celebrate Chinese New Year

A market board with figures and abbreviated listings

The Chinese New Year, which starts this Thursday, could also be cause for celebration for shrewd investors around the world.

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 holiday effect suggests stock returns on the days preceding holidays tend to be abnormally higher than those for other trading days,” Dr Rakesh Gupta, Griffith Business School, said.

“This 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.”

The results of Dr Gupta’s study with Tian Yuan have been published in the Quarterly Review of Economics and Finance.

“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.

“The study is important for investors, fund managers and policy makers. Investors may be able to capture superior returns by taking active trading strategies based on this effect.”

The paper used 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.

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.

Dr Rakesh Gupta in shirt and tie, leaning against a bookcase“High returns for China are rewards for high risk,” Dr Gupta (left) 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.”