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The Sum of All Seasonalities

Matti Keloharju; Juhani T. Linnainmaa; Peter Nyberg, School of Business Aalto University, Finland

2nd Nov 2012  11:30 am - 12:30 pm Room 214/215, H69 - Economics and Business Building

Heston and Sadka (2008) document that stock returns 'repeat' themselves in the cross-section every twelve months. We explain this puzzling pattern with a model where past same-month returns serve as noisy signals of stock characteristics associated with return seasonalities; for example, stocks that have generated high January returns in the past tend to be small and generate high returns also in future Januarys. Our model predicts that even small individual seasonalities can sum up to an economically significant cyclical pattern, that this pattern exists at any interval at which returns exhibit seasonalities, and that it is subsumed by the average past same-month return. The data are consistent with the model's predictions, offering evidence of cyclicality in daily returns at annual and weekly lags.