Christmas economics
Today’s post is going to be the last one of 2019. I am off to celebrate Christmas with my family and wish all of my readers happy holidays and a great start into the new year.
The next post will be published early in January.
PS: People who know me for some time expect to get a special Christmas report from me, but this year, I have to say, I found something that simply cannot be improved. Laura Birg and Anna Göddeke from the University of Göttingen in Germany summarized the economic research that has been done on the impact of Christmas. I wanted to write my own version of this, but their paper is so much fun to read that I gave up. You cannot improve on this one.
Below is the introductory section. Click here to read the full paper.
Santa Claus is now back at the frosty North Pole. After enjoying the Caribbean sun all summer long, he is now planning the Christmas celebration ahead. To do so, he is surrounded by his Christmas Economic Advisors (CEA). Dasher and Dancer and Prancer and Vixen, Comet and Cupid. and Donner and Blitzen together with the chairman Rudolph. who are assisting and advising him in the preparation of the Christmas Economic Report. In this report Santa. a benevolent dictator aiming to bring love and joy to everyone celebrating Christmas. sets out the planning for the next holiday season. Santa is furthermore supported by a team of elves, mainly in charge of the logistics, marketing, accounting and financing of the presents.
I wish it could be Christmas Every Day. Stock Markets before Christmas
After some troublesome years of increasing demand for presents, Santa’s finances are tight. He is not sure how to finance the next Christmas season. Thus, Santa consults the CEA. Rudolph has clear-cut advice. The capital should be invested in stocks right before Christmas because economists found a pre-holiday effect in countries celebrating Christmas. This is characterized by abnormal returns on the day(s) preceding Christmas. Investing all liquid assets in stocks will solve Santa’s financial problems within days. Even more surprising, the economic literature is not even very controversial about it. The occurrence of this effect is widespread and persistent.
But this cannot be true, Blitzen replies, it contradicts Fama’s (1970) Efficient Market Hypothesis. If it is as simple as you say, this knowledge should be sufficient for all rational investors exploiting this effect, so that it disappears. And Jagannathan et al. (2012) show that investors are more likely to make their investment choices at the end of the year. Therefore, abnormal returns on special and predetermined occasions such as Christmas cannot exist.
Rudolph is not convinced by Blitzen’s objections and refers to the paper of Lakonishok and Smidt (1988). As early as 1988, they found that pre-holiday returns are 23 times higher than those on other days for the US besides Ariel (1990) found 10 times higher returns compared to the rest of the year. Even more, several empirical studies report that returns preceding religious holidays tend to be superior to returns of other holidays (see Cao et al. 2009 and Bley and Saad 2010). And this pre-holiday effect has not only been established in the US in several studies2, but also in several other markets.
Blitzen continued: The reasons for this effect are more controversial and several hypotheses have been tested, and lots of them rejected. However, a simple and nevertheless convincing argument is put forward by Marrett and Worthington (2009). They explain the effect with investors. psychology. Before Christmas, investors are more euphoric, optimistic, and in a positive mood and buy more stocks. Furthermore, according to the findings of Bley and Saad (2010) holiday effects are obviously driven by investor cultural backgrounds and religious beliefs. Thus, the positive Christmas effect is mostly found in Christian countries.
However, Rudoph interrupts, we should hurry up and make use of this effect as long as it persists. He goes on to suggest: Chong et al. (2005) show that the Christmas effect is declining in the US stock market over the last three decades of the twentieth century. This decline of the effect might be explained by the relative sophistication of the US market and thus that Fama might be right in the long run. However, the stock market of New Zealand even seems to be less sophisticated at the moment and might therefore be a good investment. The pre-holiday effect seems to increase over time there as Cao et al. (2009) show. Santa, impressed by Rudolph’s remarks, advises the elves to prepare everything for an investment in the stock market in New Zealand. His financial problems seem to be solved.