Researchers solve the mystery of seasonal share price surges

The tendency for share prices to rise in December and January has long been a puzzle to economists. If stock markets are the efficient marketplaces that they are supposed to be, with a lot of well-informed traders able to respond instantly to new information, why should they have such a strong seasonal pattern, asks Diane Coyle?

At last a researcher has come up with an answer to this question that allows economists to cling to their view that stock market behaviour, as revealed by share prices, is always totally rational. It is that traders are reacting to underlying information that itself has a pronounced seasonal pattern.

In a paper in the recent edition of the Economic Journal, Richard Priestley from the Norwegian School of Management confirms that the prices of UK shares usually rise in December, January and April, and by more than would be expected given the movements in the kind of economic statistics such as output, prices and the money supply that normally move the stock market. The US stock market, too, has a tendency to rise in January.

This was certainly true for the FTSE 100 index this December. It has climbed 304 points, or 6 per cent, in the latest month. The Dow Jones Industrials index in the US had a weaker month, advancing by just over 1 per cent.

Figures for the rest of 1997 also broadly confirm with the pattern. January saw a 4.8 per cent rise, although this was outweighed by an 8.9 per cent surge in September on the back of increasing optimism Britain would enter the European single currency sooner rather than later, and a 6.6 per cent uplift in July. April saw a 2.9 per cent rise.

But author Richard Priestley finds that the seasonality in share price returns is caused by the increased uncertainty about these statistics in the three months in question.

In December and January the extra uncertainty concerns the pattern of demand and production in the economy over Christmas and the new year sales period. Sales at this time can set the tone for the whole year and have unusually important implications for the level of business activity.

He writes: "Announcements of the level of economic activity ... around this period provide important information regarding the performance of the economy and subsequent levels of activity in the coming year. This has general implications for the health of the economy and specifically for firms' cash flows."

Mr Priestley speculates that in April, unexpected tax changes could be the cause of the extra uncertainty.

Whatever the reason, the economics profession's "efficient markets hypothesis" appears safe. The higher the risk, the higher the return, just as the theory would predict.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Relations Officer

£13000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable