Turn-of-the-month effect
Stock index returns have historically been concentrated in a short window: the last trading day of a month and the first three of the next.
Drag across the chart to read values
The evidence
Ariel (1987) and Lakonishok and Smidt (1988) documented the effect in US data going back decades. A common explanation is the timing of salaries, pension contributions and fund flows at month start.
A simple rule set
- Buy the index at the close four trading days before month end.
- Sell at the close of the third trading day of the new month.
- Hold cash or short-term bonds otherwise.
Cautions
Calendar effects tend to weaken once they are widely published. The strategy is invested only about a third of the time, so trading costs per unit of return are high. Treat it as a timing overlay, not a standalone portfolio.
Practice
Three quick tasks. Pick an answer to check it, or open the answer below each task.
Which days form the classic turn-of-the-month window?
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Last trading day and first three of the next month. That window carried a large share of historical index returns.
A common explanation for the effect is...
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Salary and pension flows at month start. Regular inflows arrive around the turn of the month.
Why might the effect weaken over time?
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Published anomalies get traded away. Once widely known, traders front-run it.
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