Further evidence on calendar anomalies

• Published date: 01 March 2022
• Author: Yuan‐Teng Hsu,Kees G. Koedijk,Hung‐Chun Liu,Jying‐Nan Wang
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/eufm.12301

DOI: 10.1111/eufm.12301

ORIGINAL ARTICLE

Further evidence on calendar anomalies

Yuan‐Teng Hsu

1

|Kees G. Koedijk

2,3

|Hung‐Chun Liu

4

|

Jying‐Nan Wang

5

1

Research Center of Finance, Shanghai

Business School, Shanghai, China

2

School of Economics, Utrecht

University, Utrecht, The Netherlands

3

CEPR, London, United Kingdom

4

Department of Finance, Chung Yuan

Christian University, Taoyuan, Taiwan

5

College of International Finance and

Trade, Zhejiang Yuexiu University,

Shaoxing, China

Correspondence

Kees G. Koedijk, School of Economics,

Utrecht University, Heidelberglaan 8,

3584 CS Utrecht, The Netherlands; and

CEPR, London, UK.

Email: c.g.koedijk@uu.nl

Abstract

This study aims to investigate the day‐of‐the‐

week effect of cross‐market leveraged exchange‐traded

funds (LETFs) in the Taiwanese stock market. We find

that Wednesday's overnight returns are significantly

positive for bull 2X LETFs tracking major stock indices

of the Chinese market, whereas no such an effect is

found for ETFs tracking local or other international

stock markets. The “T+1”trading rule and a lagged

Monday effect potentially explain this anomaly. Fi-

nally, simulation analysis of various simple trading

rules further shows that there exist exploitable profit

opportunities in cross‐market bull 2X LETF markets.

KEYWORDS

“T+1”trading rule, cross‐market ETF, day‐of‐the‐week effect,

LETF, leveraged ETF

JEL CLASSIFICATION

C14; C22; G14; G15

EUROPEAN

FINANCIAL MANAGEMENT

Eur Financ Manag. 2022;28:545–566. wileyonlinelibrary.com/journal/eufm

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This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited and is not used for commercial purposes.

© 2021 The Authors. European Financial Management published by John Wiley & Sons Ltd.

We thank John Doukas (the editor) and the anonymous referees for very helpful comments and suggestions that greatly

improved the paper. We also thank K. Victor Chow and Chia‐Wei Huang for their insightful comments and en-

couragement. The authors are listed in alphabetical order and contributed equally to the manuscript.

1|INTRODUCTION

Investors and traders are always attracted to the idea of using leverage to increase investment

performance. For example, leveraged exchange‐traded funds (LETFs) employ the securities

comprising the underlying indices and various financial derivatives to deliver a positive

(or negative) multiple of underlying index daily returns. First introduced in the United States in

July 2006, LETFs have become popular trading vehicles, with an extremely large daily trading

volume compared to that of unleveraged ETFs.

As of October 2019, 46 (220) LETFs (ETFs) were traded on the Taiwanese stock market with

assets under management of NT$ 168 billion (NT$ 1.537 trillion). Although LETFs comprise

only 10.9% of the assets under management of ETF in Taiwan, they account for around 56.7% of

the total ETF trading volume and 52.2% of the total ETF trading value. In other words, these

LETFs now represent a substantial portion of ETF trades, even though the assets under their

management are only a small fraction of the ETF market. Given their popularity for short‐term

investment purposes, this study aims to explore whether there is a significant pattern in the

LETFs’daily returns and whether it could be exploited.

In this study, we contribute to the literature by examining the day‐of‐the‐week (DoW) effect

of cross‐market bull 2X LETFs in the Taiwanese stock market. We find that overnight returns

on Wednesdays are significantly positive for bull 2X LETFs tracking the major stock indices of

Chinese markets. However, our results show no evidence that the ETFs that track local or other

international stock markets have such a DoW effect. The Wednesday effect appears to be

unique to Taiwanese cross‐market ETFs (especially bull 2X LETFs) tracking Chinese stock

indices, and the “T+1”trading rule and a lagged Monday effect potentially explain this

anomaly. Finally, simulation analysis of implied trading rules further shows that there exist

exploitable profit opportunities in cross‐market bull 2X LETF markets.

The DoW effect is the tendency of stocks to exhibit abnormal returns on one particular

weekday, compared to the other days in the week. Kelly's (1930) study is one of the first to

uncover the Monday effect in US markets, where returns are significantly negative on that day.

However, this calendar

1

phenomenon started to receive extensive attention only after the

introduction of the weekend effect notion by Cross (1973) and French's (1980) discussion. Both

authors demonstrate that average returns on Mondays are negative and are significantly lower

than those on other weekdays. The detection of DoW effects in stock markets is a critical issue

in empirical finance, because such calendar anomalies in the stock markets, countering the

efficient market hypothesis (Fama, 1965), suggest profit opportunities for investors on a certain

single day. The DoW effect has therefore been extensively tested and confirmed in various

financial markets.

2

It can be seen in areas ranging from stocks (Agrawal & Tandon, 1994;

Hiraki et al., 1998; Keim & Stambaugh, 1984; Lakonishok & Levi, 1982; Lakonishok &

Smidt, 1988; Zhang et al., 2017) to exchange rates (Kumar, 2016; Popović& Ðurović,2014;

Yamori & Kurihara, 2004), bonds (Alexander & Ferri, 2000; Gibbons & Hess, 1981), com-

modities (Blose & Gondhalekar, 2013; Crain & Lee, 1996), precious metals (Ma, 1986), and

cryptocurrency markets (Aharon & Qadan, 2019; Caporale & Plastun, 2019).

With the rapid proliferation of financial innovations in recent years, a variety of new

financial products have been designed to deliver a multiple of the performance of the

1

Common calendar anomalies also include the time‐of‐the‐day, turn‐of‐the‐month, month‐of‐the‐year, January, and Halloween effects.

2

See Brusa et al. (2003) for a detailed review of the literature on weekend effects from 1973 to 2000.

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