Seasonal Returns and Reversals: Evidence for Mispricing Rather Than Risk

Summary

This research review examines whether predictable stock returns in particular months reflect changing risk or temporary mispricing. Its central test is seasonal reversal: if a stock earns unusually high returns in one calendar period because demand temporarily pushes its price away from fundamental value, lower returns in other periods should offset that gain. The reviewed study finds positive predictive relationships between past and future returns in the same month, alongside negative relationships involving other months. It reports that these patterns substantially offset one another in US stocks.

The review describes related evidence across daily returns, international equities, stock indices, and commodities, while noting that results are weaker for some smaller samples. Seasonal and reversal signals appear to add information beyond conventional factors, and the article discusses combining them for seasonal trading. The evidence comes from historical data and cited research, so it does not establish that the patterns will persist or remain profitable after trading costs. Because offsetting returns can erase the seasonal advantage for buy-and-hold investors, strategies may require deliberate timing and further validation.

Key ideas

• Seasonal reversal tests whether high returns in one period are offset by low returns in others.
• The reviewed evidence finds same-period return predictability alongside offsetting other-period predictability.
• The patterns are reported across several markets and frequencies, though evidence varies by asset group.
• Seasonality and seasonal reversal appear to contain information beyond conventional return factors.
• Offsetting returns can make seasonal signals less useful to buy-and-hold investors.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.