With the Holiday season upon us, economic performance is assumed to be improving for most of the businesses. Another group that is welcoming the festivities with open arms are investors. They are ready to realise gains in the financial markets, due to the so-called ‘’Holiday Effect’’. For several years, academics have been researching whether stock returns are higher on the trading day before the holidays, relative to the other trading days. This phenomenon is referred to as The Holiday Effect.

Fields (1934) was the first researcher to find evidence of such an effect. He found that the Dow Jones Industrial Average (DJIA) increased on trading days previous to a holiday compared to the remaining trading days. Ariel (1990) extended Fields’ research by analysing the equal-weighted index of stock from 1963-1982. He found that the mean return was 9 times greater on pre-holidays (0.529 percent) than other trading days (0.056 percent). Cadsby and Ratner (1992) were curious about whether the holiday effect existed in countries other than the US.

They found that the holiday effect is present in the stock markets of Australia, Canada, Hong Kong, and Japan. Lakonishok and Smidt (1998) obtained similar results, indicating the presence of the holiday effect. More precisely, the mean return of the pre-holidays (0.219 percent) was found to be 23 times greater than the mean return of normal trading days (0.0094 percent). Also, they found the following: based on their analysis of the DJIA in the last 90 years, 51 percent of the capital gains have derived from the abnormal returns of ten pre-holiday returns per year.

The findings above suggest a link between the behaviour of the investors during the holiday season and the stock market. A significant amount of studies found evidence of this, meaning that investors’ mood is influenced by the different holidays. Johnson and Tversky (1981) found that the decision to take risk is related to the mood of a particular investor. The findings suggest that a positive investor’s mood would result in investors being more risk-seeking in their behaviour, while a negative mood would imply the opposite. The authors’ results propose the correlation between investors’ mood and the stock market.

Ultimately, it would imply that the stock market is an indicator of the mood of investors. Nofsinger (2005) illustrated the effect of the level of optimism and pessimism of the investors on their financial decision-making process. He found that extreme behaviours would have a significant effect on the stock market. More precisely, a mood of euphoria could lead to stock market bubbles. Investors would not comprehend the occurrence of the bubble during the mood of euphoria, making it more probable for the stock market bubble to burst. Examining the holiday effect of St.Patrick’s Day and the Jewish High Holy Days of Rosh Hashanah and Yom Kippur, Frieder and Subrahmanyam (2004) discovered the link between positive emotions and the holiday effect. As investors are in an elevating mood due to festivities, their confidence increases and therefore the tendency to invest in risky assets. By focusing on investors’ emotions, which is proxied by turnover, volume, and small stock returns, Teng and Liu (2013) find that the pre-holiday effect is solely derived from investors’ emotions rather than macroeconomic or risk/return trade-offs factors.

The Holiday season will therefore not only bring joy to households, but it is also expected to bring gifts on the stock market.


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