Seasonal Reversals in Expected Stock Returns

Stocks tend to earn high or low returns relative to other stocks every year in the same calendar month (Heston and Sadka 2008; Keloharju, Linnainmaa, and Nyberg 2016). In this paper, we show that these seasonalities are balanced by seasonal reversals: a stock that has a high expected return relative to other stocks in one month has a low expected return relative to other stocks in the other months. The seasonalities and seasonal reversals add up to zero over the calendar year. Our evidence suggests that return seasonalities are likely due to temporary mispricing. Seasonal reversals are economically large, statistically highly significant, and they resemble, but are distinct from, long-term reversals. A factor that estimates expected returns from both average same- and other-month returns has a t-value of 9.93, and it is robust throughout the 1963-2016 sample period.