The Capm and The Calendar

The CAPM and the Calendar: Empirical Anomalies and the Risk-Return Relationship
Author(s): Charles Bram Cadsby

Source: Management Science, Vol. 38, No. 11, Focused Issue on Financial Modeling (Nov., 1992),
pp. 1543-1561
Published by: INFORMS
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MANAGEMENT SCIENCE
Vol. 38, No. 11, November 1992
Printed in U.S.A.
THE CAPM AND THE CALENDAR: EMPIRICAL ANOMALIES

AND THE RISK-RETURN RELATIONSHIP*
CHARLES BRAM CADSBY
Department of Economics, University of Guelph, Guielph,Ontario, Canada N IG 2W1
Tinic and West ( 1984) argue that a tradeoff between risk and return exists only in January.
This study demonstrates that it is not just the January Effect on stock returns which is related to
the measured risk-returnrelationship and how that measure is apparentlyaffectedby the calendar.
Other returns anomalies can also be paired with a conclusion about the relationship between risk
and return. For example, risk appears to be rewarded at the turn of the month but not during
the rest of the year and late in the week but not early in the week. This paper argues that, given
the returns anomalies, the corresponding calendar effects on the risk-returnrelationship are consistent with the CAPM. Thus, the anomaly to be explained is not the relationship between risk
and return focused on by Tinic and West ( 1984) but ratherthe calendar related variations in the
returns themselves.
(STOCK MARKET ANOMALIES;CAPITALASSET PRICING MODEL, JANUARY EFFECT,
TURN-OF-MONTH EFFECT, DAY-OF-WEEK EFFECT, RISK-RETURN RELATIONSHIP)
1. Introduction
Some puzzling empirical facts about the relationship between the stock market and
the calendar have recently been uncovered. First, average monthly returns for an equalweighted index of all firms listed on the New York Stock Exchange are significantly
higher in January than during the rest of the year (Rozeff and Kinney 1976). This
phenomenon is especially pronounced for small firms that have done poorly during the
previous year (Reinganum 1983) to five years (De Bondt and Thaler 1985, 1987, 1989)
and is particularly apparent during the first five trading days of January (Keim 1983).
Keim (1989) provides evidence suggesting that these apparent regularities are partially
due to a systematic bias in recorded closing transactions prices caused by calendar-related
movements between the bid and the ask. Similar patterns are observed outside the United
States (Gultekin and Gultekin 1983; Berges, McConnell and Schlarbaum 1984; Kato
and Schallheim 1985; Ziemba 1991) .
Second, average daily returns for the S&P 500 index are negative on Monday, positive
on other days and highest on Wednesdays and Fridays over a number of different time
periods when returns are measured from daily close to daily close (Cross 1973; French
1980). A similar pattern of returns is observed for the Dow Jones Industrial Average
(DJIA). The overall negative effect between Friday close and Monday close for the DJIA
occurs on Monday itself during the 1960s but moves backward to the period between
Friday close and Monday opening by the late 1970s (Rogalski 1984; Smirlock and Starks
1986). During January, average returns from Friday close to Monday close are positive
(Rogalski 1984). Similar effects have been found in other countries (Jaffe and Westerfield
1985; Kato, Schwarz and Ziemba 1989). Connolly (1989) argues that these regularities
are due partially to the use of estimation and testing procedures based upon incorrect
statistical assumptions. Robust estimation techniques continue to show some support
for a weekend effect prior to the mid 1970s.
Third, average returns based on 90 years of Dow Jones Industrial Average data are
positive for the four-day period which includes the last and first three days of the month
* Accepted by William T. Ziemba; received October 1990. This paper has been with the author 8 months
for 2 revisions.
1543
0025-1909/92/38 1 1/1543$01.25
Copyright ? 1992, The Institute of Management Sciences

1544
CHARLES BRAM CADSBY
but negative for the period which includes all remaining days (Lakonishok and Smidt
1988).' Cadsby and Ratner (1992) find similar effects in Canada, the U.K., Australia,
Switzerland and West Germany, but not in Hong Kong, Italy, France or Japan. Ziemba
(1991) finds a turn-of-month effect in Japan that runs over the last five and first two
trading days of the month.
Perhaps even more puzzling is the relationship between the calendar and empirical
tests of the Capital Asset Pricing Model (CAPM). Using a large sample of New York
Stock Exchange monthly data from 1935 to 1982, Tinic and West (1984) find that the
risk-return relationship described by the two-factor CAPM exists only during January
and not during the other eleven months of the year. Ritter and Chopra (1989) demonstrate, using data from 1935 to 1986, that even in January a significantly positive riskreturn relationship exists only for small firms. Furthermore, Tinic and West (1986) show
that, even when the two-parameter CAPM is extended to permit specific risk as well as
nonlinearities in the relationship between market risk and return to play a role in asset
pricing, important seasonal anomalies remain in the 1935-82 NYSE data. Carroll and
Wei (1988) demonstrate with 1926-85 NYSE data that adding firm size to this extended
model in a manner consistent with the general CAPM developed by Levy (1978) does
not account for these anomalous results. Chang and Pinegar (1988a, 1988b) compare
month-to-month holding period yields from 1927-83 on government bonds, corporate
bonds and stocks to reinforce Tinic and West's conclusion that risk is rewarded only
during January. Similar resultsare found for Canada and a number of European countries
in the two-parameter case (Cadsby and Tapon 1987; Corhay, Hawawini, and Michel
1987; Tinic and Barone-Adesi 1987).2
The conclusion that risk is rewarded only during January is a startling one which, if
taken seriously, has important practicalimplications. This paperprovides some perspective
on this apparently anomalous result. This is done by using daily CRSP data from January
1963 to December 1985 to examine further the risk-returnrelationship in the context of
the CAPM. Use of daily data allows a comparison between calendar anomalies on stock
returns based on periods of less than a month with the risk-return relationship over
similar periods. This study, like Tinic and West (1984), does not distinguish between
small and large firms because data on firm size were unavailable to the author.
The central conclusion of this paper is that it is not just the January Effect on stock
returns which is related to the measured risk-returnrelationship and how that measure
is apparently affected by the calendar. Each of the other calendar effects mentioned above
can be paired with a conclusion about the relationship between risk and return that in
isolation would seem as surprising and significant as the one drawn by Tinic and West
(1984). For example, looked at from one perspective,the data indicate that risk is rewarded
at the turn of the month but not during the rest of the year, even when that part of
January not at the turn of the month is included in the data for the rest of the year.
Looked at from another perspective, risk is rewarded on Wednesdays, Thursdays and
Fridays but not on the low return days of Monday and Tuesday. In fact, the data indicate
that risk is severely penalized on Mondays.
Ironically, the only calendar effect on stock returns that does not produce such a strong
conclusion about the relationship between risk and return in the context of this data set
is the JanuaryEffect itself. In contrast to Tinic and West (1984), the CAPM risk premium
is significant both during January and during the rest of the year though, corresponding
' Other anomalies include holiday effects and intradayeffects. Summary discussions appear in Thaler ( 1987a,
1987b), Clark and Ziemba ( 1987) and Vander Cruyssen and Ziemba ( 1991).
2Cadsby (1989) finds that there is no January Effect either on stock returns or on the risk premium in
Canadian daily data running from January 1977 to December 1987. However, there is a Turn-Of-The-Year
Effect that behaves similarly, from December 21 to January 5.

1545
CAPM AND THE CALENDAR
again to the returns data, it is significantly higher in January than in any other month.
However, the turn-of-the-year period running from December 24 to January 28 exhibits
a significant risk premium while the rest of the year does not. Eliminating the highly
negative Monday returns from the sample produces a significant risk premium both from
December 24 to January 28 and also during the rest of the year. Thus, the Tinic and
West (1984) result that risk goes unrewarded from February to December appears to
arise principally from the behavior of stock prices on Mondays from January 29 to
December 23.
Tinic and West (1984) interpret their results to mean that a tradeoff between risk and
return exists only in January. They contrast their results with "the received version of
modern finance" which builds "heavily on the idea of a relatively consistent risk-return
tradeoff" (Tinic and West 1984, p. 573). The CAPM actually suggeststhat the relationship
between risk and return depends on the average level of returns during the period under
consideration. In particular, a positive (negative) relationship between risk and return
is predicted conditional on the market return being greater (less) than the risk free rate.
This study essentially uses calendar time periods as proxies for levels of returns. The
estimated conditional relationships between risk and return are as predicted: positive
and significant when market returns are high and negative or insignificant when market
returns are low. Thus, the anomaly to be explained is not the relationship between risk
and return focused on by Tinic and West (1984) but ratherthe calendar related variations
in the returns themselves.3
The paper is organized as follows. The second section deals with the data and methodology used to estimate the CAPM. The third section discusses the results and compares
calendar effects on rates of return with calendar effects on the risk-return relationship.
The fourth section of the paper looks briefly at calendar effects in the context of the fourparameter model originally estimated by Fama and MacBeth (1973) and later Tinic and
West (1986). Some conclusions are drawn in the fifth section.
2. Data and Methodology
The data for this study are taken from the Center for Research on Security Prices
Daily Returns Tape from January2, 1963, to December 31, 1985. Ten years of continuous
returns data are required for a stock to be included in the study. The number of stocks
included ranges between 672 and 874, depending upon the years under consideration.
An equally weighted index of all securities in the CRSP data base is used to represent
the market rate of return.
The methodology used is similar to that employed in the classic study of the CAPM
using monthly U.S. data by Fama and MacBeth (1973). Stocks are divided into portfolios
based on the size of the stock's beta estimated over a five-yearportfolio formation period.
This procedure avoids the data-snooping bias that may result from sorting stocks based
on size or within-sample betas (Lo and MacKinlay 1990). Betas are estimated by performing an OLS regression on Equation (1) for each stock, using data from January 2,
1963, to December 31, 1967, inclusive.
Rit = ai + fiRMEt +
i = 1, . ..
, N,
t =
(it,
where
. . . , T,
Rit = return on asset i in period t,

RMEt = return on the equally weighted index in period t,
fit =
a zero mean, random disturbance term.
3This paragraphborrows heavily from insightful comments made by an anonymous referee.

(1)
1546
CHARLES BRAM CADSBY
These estimates are used to rank the stocks by decreasing order of estimated beta and
to divide them into 20 portfolios according to rank. The middle 18 portfolios each
contain int(N/20) stocks, where int(N/20) is the largest integer equal to or less
than N/20. If N is even, the first and last portfolios are each assigned int(N/20)
+ 0.5 [N - 20 int(N/20)] stocks. If N is odd, the high beta portfolio is assigned the
extra stock.
The betas estimated from the 1963-67 data are used only to form portfolios. Stocks
are divided into portfolios because estimates of portfolio betas are more precise than
estimates of betas on individual securities. The portfolios are formed by rank ordering
of the betas to ensure that a wide range of portfolio betas is obtained (Fama and
MacBeth 1973).
Portfolio betas for use on January 2, 1973, are calculatedby averagingbetas reestimated
for individual securities within each of the 20 portfolios using data from January 2, 1968,
to December 31, 1972. Only stocks for which returns are reported on January 2, 1973,
are used to calculate portfolio betas for that day. This averaging procedure is repeated
for each day of 1973 to take account of delisted securities or securities for which returns
are missing.
In order to calculate portfolio betas for 1974, the start date is moved up one year and
the process of portfolio formation and portfolio estimation is repeated using data from
1964 to 1973. Similar updates are made until the portfolio betas are obtained for each
day from January 2, 1973, to December 31, 1985. Finally, following Calvet and Lefoll
(1985), the portfolio formation and estimation processes are repeated working backwards
to produce portfolio betas for each day from January 2, 1963, to December 31, 1972.
Daily portfolio returns (Rp,) are calculated as arithmetic averages of returns within
each portfolio. The daily portfolio returnsand the portfolio betas are then used to estimate
a zero-beta rate of return ('j0) and a market risk premium (j I) for each day from January
2, 1963, to December 31, 1985 inclusive using Equation (2).
(2)
Rp =- Yot + yI,f3p-1 + ert,
where p = 1, .5. , 20. Averages of these estimates over various time periods are reported below.
This methodology was chosen to ensure that the results contained in this paper would
be easily comparable with those of Fama and MacBeth (1973) and Tinic and West (1984,
1986). However, the methodology employed does not deal with a number of possible
sources of bias, both in the calculation of returns and in the calculation of betas.
First, returns may be biased upwards due to the bid-ask effect discussed in Blume and
Stambaugh (1983). The bias emanating from the bid-ask effect is serious for calculated
returns on the shares of relatively small firms. This problem may be slightly exacerbated
by a further upward bias in calculated returns, emanating from the effects of nonsynchronous trading. However, the latter bias is negligible relative to the former (Blume
and Stambaugh 1983).
Second, nonsynchronous trading may lead to a downward bias in calculated OLS
betas, especially in the case of small firms which trade relatively infrequently (Scholes
and Williams 1977; Dimson 1979; Roll 1981) .4 However, Ziemba (1991) shows that
Several techniques are available to deal with this problem, most notably those developed by Dimson ( 1979)
and Scholes and Williams ( 1977 ). Use of these techniques reduces bias but introduces noise. Fowler, Rorke
and Jog ( 1980) consider each of these techniques as well as several others on a sample of securities, artificially
made first moderately and then severely "thin." They conclude as follows, where SW refers to the ScholesWilliams technique:
In general, the OLS beta estimates seem to be better than those produced using any of the bias
correcting techniques. The SW technique seems to yield some improvement when extremely thin
betas are considered. It is interesting to note, however, that while the SW technique seems to

1547
although betas for small firms appear to be surprisingly low in Japan, using standard
bias-correction procedures such as those suggested by Dimson (1979) and Scholes and
Williams (1977) results in only minor changes in the actual beta estimates. In addition,
Ritter and Chopra (1989) note that betas tend to increase when firm value falls. This
provides another reason to expect that betas calculated for small firms may be biased
downwards.
Third, beta estimates may be correlated with whatever unknown variable is ultimately
responsible for turn-of-the-year and other returns anomalies which may be connected
primarily to the shares of small firms (Ritter and Chopra 1989). This problem could be
alleviated through the use of a value-weighted index as a market proxy. However, to
ensure comparability with earlier work, an equally weighted index was employed in this
study. Thus, the results reported below must be interpreted with caution.
3. Results of the Two-Parameter Case
Table 1 reports the average rate of return on the equally weighted index and the
average values of 'j0 and 'IKfor all months together and for each month individually.
The average rate of return, % and 7y,are each positive and significant when averaged
over all days between January 2, 1963 and December 31, 1985.5 However, Januaiy is
the only month in which all three of the reported averages are significant. The risk
premium is also significant in March. These results are broadly consistent with previous
studies and confirm the presence of a January seasonality in the data.
Table 2 reports the same information for all days in all months, excluding each month
in turn. In contrast to Tinic and West (1984), there is a significant relationship between
risk and return in all cases, including the one in which January data are excluded from
the averaging process. Table 3 reports results for January versus the rest of the year for
two subperiods, 1963-1972 and 1973-1985. In both cases, the risk premium loses its
significance when January is excluded from the data.
Table 4 reports results for the following dummy variable regressions using data from
January 1963 to December 1985.
12
RME=01
+ 0 OiDi+ Et,
(3)
i=2
12
zjt = 01 +
01iDi + ?jt,
(4)
i=2
where j = 0, 1. The intercept term represents January and D2 through DI2 are dummy
variables representing the other months of the year. Despite the fact that data excluding
Januaryproduce a significantrisk premium over the whole period, 1963-1985, the average
rates of return for months other than January are significantly lower than for January.
The risk premium is significantly lower in every month with the exception of March.
The January Effect was initially isolated using monthly data. The daily data suggest
that the January Effect is really a Turn-Of-The-Year Effect which should include the last
correct for the downward bias, the large amount of noise introduced tends to increase the variance
of the estimator: i.e. the SW estimator appears to be consistent but quite inefficient.. . . Overall,
there does not yet exist a technique that seems to have general applicability and effectiveness in
reducing thin trading induced bias so as to produce any significant improvement over the OLS
estimator using a conventionally calculated index.
The OLS estimator was used here to facilitate comparison with earlier studies.
' Following Tinic and West ( 1984, 1986), one-tailed tests are used whenever theory predicts the sign of a
parameter.

1548
CHARLES BRAM CADSBY
TABLE 1
Average rate of return on the equally weighted index and average values of the intercept and slope coefficients
of the two-parameter model, by month. Daily data from January 2, 1963 to December 31, 1985 were used to
produce results in Tables 1 to 16. The equation being estimated is:
Rpt=Yot
+ Y1f1-1
Ep
The t statistics are in parentheses. * (**) [***] denotes a coefficient significant at the 5 (1) [0.1] percent level in
this and succeeding tables. One-tailed tests are used in Tables 1, 2, 3, 5, 7, 9, 10 and 11.
Averaged over All
Days in
Avg. Rate of Return

on Market Index
Avg. Intercept
Coefficient (j')
Avg. Slope
Coefficient (j)
Sample
Size
All months
0.00075***
(7.46559)
0.00335***
(8.62818)
0.00043
(1.32618)
0.00082**
(2.47588)
0.00078**
(2.71597)
0.00002
(0.05892)
0.00018
(0.57467)
0.00036
(1.09313)
0.00071 *
(2.08198)
0.00050
(1.50040)
0.00008
(0.22936)
0.00095**
(2.41895)
0.00081 **
(2.36447)
0.00035***
(5.41976)
0.00055*
(2.22029)
-0.00026
(-1.15092)
-0.00004
(-0.20877)
0.00028
(1.29140)
-0.00000
(-0.00987)
0.00033
(1.50691)
0.00031
(1.60062)
0.00022
(1.10021)
0.00023
(0.95378)
0.00135***
(5.66079)
0.00048*
(1.96699)
0.00065**
(2.72434)
0.00034***
(3.00604)
0.00182***
(4.70607)
0.00046
(1.16076)
0.00087**
(2.32940)
0.00059
(1.57978)
-0.00008
(-0.17281)
-0.00007
(-0.19095)
0.00002
(0.06382)
0.00052
(1.41541)
0.00018
(0.45793)
-0.00102
(-2.55833)
0.00069
(1.47845)
0.00019
(0.51739)
5778
January
February
March
April
May
June
July
August
September
October
November
December
489
439
502
476
487
489
480
505
466
504
458
483
week of December together with the first four weeks of January. This becomes apparent
when average rates of return and average values of ^i0and ^ylare calculated by week.
These results are not reported in detail here in order to economize on space.6 They
indicate that the six weeks with the highest average rate of return on the market index
include the first four and the last (defined to include the last eight days of the year) weeks
of the year. They also show that ^ I is significantly positive in eight weeks out of 52. Only
five of these weeks are adjacent, namely the last week of December and the first four
weeks of January.
The presence of a Turn-Of-The-Year Effect running from December 24 to January
28 is corroborated by the results reported in Tables 5 and 6. Table 5 shows that the
average value of the CAPM risk premium is significantly positive during the turn of the
year but not during the rest of the year both for 1963 to 1985 and for the two subperiods.
Table 6 reports dummy variable regressionsfor the whole period on equations analogous
to Equations (3) and (4) in which the turn of the year is the intercept, and each other
month, including that part of December not included in the turn-of-the-year period, is
6
They are available upon request from the author.

CAPM AND
1549
THE CALENDAR
TABLE 2
of the two-parameter model, for indicated eleven-month periods. The equation being estimated is:
Rp = Yoi +
Averaged over All Days

in all Months
Excluding
January
February
March
April
May
June
July
August
September
October
November
December
Avg. Rate of Return

on Market Index
0.00051 ***
(4.94837)
0.00078***
(7.36497)
0.00075***
(7.05225)
0.00075***
(7.02326)
0.00082***
(7.87904)
0.00080***
(7.58862)
0.00079***
(7.45100)
0.00076***
(7.16980)
0.00077***
(7.33108)
0.00082***
(7.79249)
0.00073***
(7.06310)
0.00075***
(7.08483)
Yit/p-i
EP1.
Avg. Intercept
Coefficient (%y)
0.00033***
(4.96565)
0.00040***
(5.93507)
0.00039***
(5.68466)
0.00035***
(5.26831)
0.00038***
(5.60943)
0.00035***
(5.20584)
0.00035***
(5.18339)
0.00036***
(5.32303)
0.00036***
(5.38064)
0.00025***
(3.80469)
0.00034***
(5.06268)
0.00032***
(4.81080)
Avg. Slope
Coefficient (jYI)
0.00021 *
(1.73400)
0.00033**
(2.79784)
0.00029**
(2.44842)
0.00032**
(2.67852)
0.00038***
(3.25187)
0.00038***
(3.19206)
0.00037***
(3.11022)
0.00033**
(2.71854)
0.00036**
(2.99455)
0.00047***
(3.97319)
0.00031 **
(2.67239)
0.00036**
(2.97663)
Sample
Size
5829
5339
5276
5302
5291
5289
5298
5273
5312
5274
5320
5295
represented by a dummy variable. Both RME and 1 are significantly lower than during
the turn of the year in every other month, including that part of December not covered
by the turn-of-the-year period. Table 7 reports the average rate of return on the equally
TABLE 3
of the two-parameter model, for all months, January only and the rest of the year. The equation being estimated
is:
Rp = Yoi + YII/pi-I +
Averaged over All
Days in
Avg. Rate of Return

on Market Index
All months
1963-1972
All months
1973-1985
January
1963-1972
Feb-Dec
1963-1972
January
1973-1985
February-December
1973- 1985
0.00068***
(4.74134)
0.00081***
(5.76903)
0.00305***
(6.55837)
0.00046***
(3.07431)
0.00358***
(6.11039)
0.00055***
(3.87718)
EP'1
Avg. Intercept
Coefficient (%o)
0.00032***
(3.28032)
0.00037***
(4.32651)
0.00055
(1.57844)
0.00030**
(2.93954)
0.00056
(1.58839)
0.00035***
(4.02481)
Avg. Slope
Coefficient (QiI)
0.00038*
(2.06776)
0.00031*
(2.18186)
0.00151 **
(2.88801)
0.00028
(1.41525)
0.00206***
(3.71663)
0.00015
(1.03734)

Sample
Size
2493
3285
212
2281
277
3008
CHARLES BRAM CADSBY
1550
TABLE 4
Differences in returns on the equally weighted index (RME), %oand
il, by month, with January as the intercept and a dummy variable
for each other month. The estimated equations are:
12
12
RME = 01 +
01 + Z OiDi+ j,.
+iDi+
i=2
i=2
with j = 0, 1, respectively. D2 through DI2 are dummy variables

representing the months of the year from February to December.
Two-tailed tests are used in Tables 4, 6 and 8.
Variable
6
62
03
04
05
66
07
68
69
010
6il
612
RME
(o)
(.1)
0.00335***
(9.728)
-0.00292***
(-5.832)
-0.00254***
(-5.239)
-0.00257***
(-5.239)
-0.00333***
(-6.825)
-0.00317***
(-6.504)
-0.00299***
(-6.106)
-0.00264***
(-5.471)
-0.00285***
(-5.780)
-0.00327***
(-6.758)
-0.00240***
(-4.840)
-0.00254***
(-5.194)
0.00055*
(2.516)
-0.00081*
(-2.530)
-0.00060
(-1.924)
-0.00027
(-0.871)
-0.00056
(-1.783)
-0.00023
(-0.725)
-0.00024
(-0.775)
-0.00033
(-1.069)
-0.00033
(-1.036)
0.00079*
(2.556)
-0.00008
(-0.242)
0.00010
(0.314)
0.00182***
(4.638)
-0.00135*
(-2.375)
-0.00095
(-1.732)
-0.00123*
(-2.196)
-0.00190***
(-3.418)
-0.00189***
(-3.412)
-0.00179**
(-3.221)
-0.00130*
(-2.365)
-0.00164**
(-2.925)
-0.00284***
(-5.151)
-0.00113*
(-2.010)
-0.001 63**
(-2.927)
TABLE 5
of the two-parameter model, for turn of year (December 24 to January 28) versus rest of year. The equation
being estimated is:
Rp, = Yoi + YJiiP-i
Averaged over All

Days in
Avg. Rate of Return

on Market Index
Turn of year
1963-1985
Rest of year
1963-1985
Turn of year
1963-1972
Rest of year
1963-1972
Turn of year
1973-1985
Rest of year
1973-1985
0.00363***
(9.97365)
0.00045***
(4.34838)
0.00334***
(7.58641)
0.00040**
(2.66214)
0.00385***
(7.03322)
0.00049***
(3.43884)
EP1.
Avg. Intercept
Coefficient (%o)
0.00074***
(3.18971)
0.00031 ***
(4.60620)
0.00084***
(2.52846)
0.00026**
(2.59692)
0.00066*
(2.06290)
0.00034***
(3.84477)
Avg. Slope
Coefficient (i I)
Sample
Size
0.00 195***
(5.52229)
0.00018
(1.45854)
0.00 158***
(3.11032)
0.00026
(1.29737)
0.00223***
(4.58371)
0.00012
(0.76789)
548

5230
238
2255
310
2975
1551
TABLE 6
il, with the turn of the year (December 24 to January 28) as the
intercept and a dummy variable for each month from February to
December. The estimated equations are:
12
12
RME =O + E OiDi+E,
i'16
+ E OiDi+gj,
i=2
i=2
with j = 0, 1, respectively. The intercept represents the days from

December 24 to January 28, D2 through D12 are dummy variables
representing February to December. The data from January 29-31
have been grouped with February.
Variable
RME
(o)
( 1)
00
0.00363***
(11.166)
-0.00311 l***
(-6.583)
-0.00281 *
(-5.985)
-0.00284***
(-5.972)
-0.00360***
(-7.611)
-0.00344***
(-7.282)
-0.00326***
(-6.867)
-0.00292***
(-6.225)
-0.00312***
(-6.524)
-0.00354***
(-7.551)
-0.00267***
(-5.553)
-0.00367***
(-7.201)
0.00074***
(3.561)
-0.00092**
(-3.035)
-0.00078**
(-2.600)
-0.00046
(-1.507)
-0.00074*
(-2.449)
-0.00041
(-1.361)
-0.00043
(-1.410)
-0.00052
(-1.721)
-0.00051
(-1.673)
0.00060*
(2.008)
-0.00026
(-0.855)
-0.00033
(-1.004)
0.00 195***
(5.253)
-0.00147**
(-2.718)
-0.00108*
(-2.017)
-0.00135*
(-2.490)
-0.00202***
(-3.749)
-0.00202***
(-3.743)
-0.00192***
(-3.545)
-0.00 143**
(-2.670)
-0.00177**
(-3.237)
-0.00296***
(-5.536)
-0.00126*
(-2.295)
-0.00225***
(-3.870)
62
03
04
05
66
07
68
69
010
6il
612
weighted index and the average value of 0 and 1yby day of the week. The averageRME
is lowest on Mondays, low on Tuesdays, and highest on Wednesdays, Thursdays and
Fridays. The relatively low measured RME on Tuesdays could be the result of measurement error owing to thin trading causing some part of the well-known weekend effect to
be diffused over Tuesdays (Theobald and Price 1984).7 The results in Table 7 also indicate
that there is a significantly positive CAPM risk premium on Wednesdays, Thursdays,
and Fridays but not on Mondays or Tuesdays.
If the t statistics attached to RME and y1 for Mondays are regardedas testing the null
hypothesis against a two-tailed alternative, both the average rate of return and the risk
premium for Mondays may be viewed as negatively significant. The results in Table 7
also indicate that this is true for the two subperiods, 1963-1972 and 1973-1985. The
fact that increased market risk is significantly associated with lower returns on Mondays
is hardly surprising once it is accepted that the average rate of return itself is significantly
7 Theobald and Price ( 1984) show that thin trading tends to cause measurement error which may mask
calendar effects in the data.

1552
CHARLES BRAM CADSBY
TABLE 7
of the two-parameter model, by day of the week. The equation being estimated is:
Rp, =Yoi +
Averaged over All
Days in
Avg. Rate of Return

on Market Index
Mondays
Avg. Intercept
Coefficient (%o)
-0.00110
(-4.22204)
0.00004
(0.17852)
0.00135***
(6.03183)
0.00115***
(5.34893)
0.00227***
(11.05813)
0.00 120***
(11.17154)
-0.00109
(-2.85309)
0.00 111***
(7.36187)
-0.00111
(-3.11606)
0.00 126***
(8.43315)
Tuesdays
Wednesdays
Thursdays
Fridays
All days excluding
Monday
Mondays
1963-1972
Tuesdays to Fridays
1963-1972
Mondays
1973-1985
Tuesdays to Fridays
1973-1985
(-P? .
I3pi-1+
Avg. Slope
Coefficient (Yi)
Sample
Size
-0.00178
(-6.47273)
-0.00003
(-0.12476)
0.00130***
(4.74268)
0.00049*
(2.02218)
0.00 167***
(7.22727)
0.00085***
(6.86993)
-0.00195
(-4.28491)
0.00095***
(4.77634)
-0.00165
(-4.88098)
0.00078***
(4.93770)
1118
0.00068***
(4.64718)
0.00030*
(2.06953)
0.00004
(0.23491)
0.00050
(3.37551)
0.00024*
(1.92232)
0.00027***
(3.75697)
0.00085***
(4.07877)
0.00019*
(1.72745)
0.00055**
(2.69674)
0.00033***
(3.47996)
1179
1166
1161
1154
4660
489
2004
629
2656
negative at the beginning of the week. High beta stocks should earn lower returns over
periods during which the return on the market is negative. Thus, the real anomaly here
concerns the returns themselves rather than the CAPM risk premium.
Table 8 reports the results of dummy variable regressions similar to Equations (3) and
TABLE 8
l,,by day of the week, with Monday as the intercept and a dummy
variable for each other day. The estimated equations are:
12
RME=01+
12
iDi+ E,
= o6+
j,
i=2
iDi +j
i=2
with j = 0, 1, respectively. The intercept represents Monday. D2

through D5 are dummy variables representing the days of the week
from Tuesday through Friday.
Variable
RME
(o)
(i I)
0,
-0.00 1 10***
(-4.861)
0.00114***
(3.599)
0.00246***
(7.748)
0.00225***
(7.093)
0.00337***
(10.603)
0.00068***
(4.664)
-0.00038
(-1.887)
-0.00065**
(-3.157)
-0.00018
(-0.896)
-0.00044*
(-2.129)
-0.00178***
(-6.922)
0.00175***
(4.876)
0.00308***
(8.541)
0.00228***
(6.310)
0.00345***
(9.562)
02
03
04
05

1553
(4) with Monday as the intercept and a dummy variable for each other day, using data
from January 1963 to December 1985. The results indicate that the return on the equally
weighted index and y are significantly higher on Tuesdays, Wednesdays, Thursdays and
Fridays than on Mondays.
Table 9 looks at the interrelationship between Turn-Of-The-Year and Day-Of-TheWeek Effects for 1963-1985 and two subperiods, 1963-1972 and 1973-1985. The rate
of return and the risk premium are positive and significant on Tuesdays to Fridays, both
at the turn of the year and during the rest of the year in each of the three periods.
However, in all three cases, the estimates of the values of these coefficients are much
higher at the turn of the year. As in Rogalski (1984), the average rate of return for
Mondays at the turn of the year is positive. It is also significant for the 1963-1985 period
as a whole and for the later subperiod. The risk premium for Mondays at the turn of the
year is not significant in either subperiod or in the period as a whole. On the other hand,
the average rate of return and the risk premium for Mondays during the rest of the year
are both negative in all three periods. The t statistics are large and reject the null against
a two-tailed alternative at the 0.1 percent level.
TABLE 9
of the two-parameter model, for Monday versus the rest of the week, for turn of the year (December 24 to
January 28) versus the rest of the year, by subperiods. The equation being estimated is:
Rp=Yot
Averaged over All

Days in
Avg. Rate of Return

on Market Index
it/p-i
+ Epr.
Avg. Intercept
Coefficient (%o)
Avg. Slope
Coefficient (i 1)
Sample
Size
1963-1985
Mondays at turn of
year
Tuesdays-Fridays at
turn of year
Mondays in rest of
year
Tuesdays-Fridays in
rest of year
0.00235**
(2.50948)
0.00393***
(10.08137)
-0.00146
(-5.44573)
0.00091 ***
(8.26162)
0.00 185***
(3.28861)
0.00048*
(1.87867)
0.00056***
(3.71530)
0.00025***
(3.31828)
-0.00023
(-0.30408)
0.00247***
(6.29610)
-0.00194
(-6.63810)
0.00068***
(5.23596)
0.00081
(0.68188)
0.00393***
(8.57991)
-0.00128
(-3.18829)
0.00081 ***
(5.13399)
0.00218**
(3.14555)
0.00053
(1.41202)
0.00071 ***
(3.28312)
0.00015
(1.33673)
-0.00226
(-1.93808)
0.00248***
(4.53895)
-0.00192
(-3.93592)
0.00079***
(3.71529)
0.00348**
(2.56220)
0.00394***
(6.61173)
-0.00160
(-4.44199)
0.00098***
(6.47233)
0.00160*
(1.91688)
0.00044
(1.26434)
0.00044*
(2.11193)
0.00032***
(3.24235)
0.00126
(1.27407)
0.00246***
(4.44719)
-0.00197
(-5.50157)
0.00061***
(3.69020)
106
442
1012
4218
1963-1972
Mondays at turn of
year
Tuesdays-Fridays at
turn of year
Mondays in rest of
year
Tuesdays-Fridays in
rest of year
45
193
444
1811
1973-1985
Mondays at turn of
year
Tuesdays-Fridays at
turn of year
Mondays in rest of
year
Tuesdays-Fridays in
rest of year

61
249
568
2407
1554
CHARLES BRAM CADSBY
Tinic and West (1984) found that a CAPM with a positive risk premium appears to
exist only during January. This paper reports a similar conclusion in that removing a
five-week period around the turn of the year causes the CAPM risk premium to lose
statistical significance. However, the results in Table 9 suggest that the underlying reason
for this result is the peculiar behavior of stock prices on Mondays between January 29
and December 23. The CAPM works as predicted both at the turn of the year and on
Tuesdays to Fridays during the rest of the year.
Lakonishok and Smidt (1988) found that over a 90-year period returns on the DJIA
were positive around the turn of the month, defined as the last and first three trading
days of the month, but negative during the rest of the year. Table 10 indicates a less
dramatic Turn-Of-The-Month Effect from 1963 to 1985 and in the two subperiods.
Although the equally weighted index earns positive returns both at the turn of the month
and during the rest of the year for the period as a whole and both subperiods, returns
are lower during the rest of the year. A dummy variable regression designed to test
whether or not this difference is significant produces a t statistic of 6.110, indicating that
returns are indeed significantly lower during the rest of the year for the period as a whole.
Once again, the calendar effect on returns makes itself felt in the results on the riskreturn relationship. Table 10 indicates that the risk premium is significantly positive
during the turn-of-the-month period but not during the rest of the year for all three
periods. The dummy variable regression results for the entire 1963-1985 period show
that the risk premium is also significantly lower during the rest of the year than at the
turn of the month, with a t statistic of 3.270.
Table 11 reports on the interrelationship between Turn-Of-The-Month and Day-OfThe-Week Effects. The average rate of return and the CAPM risk premium are both
positive and significant from Tuesdays to Fridays at the turn of the month and during
the rest of the year, though both the average return and the risk premium are higher
during the turn-of-the-month period. Thus, the lack of empirical corroboration for a
CAPM with a positive risk premium during the non-turn-of-the-month period is due, as
in the non-turn-of-the-year case, primarily to the behavior of stock returns on Mondays.
The results reported so far have indicated that both the turn of the year and the turn
of the month were relatively good times to be in the stock market between 1963 and
TABLE 10
of the two-parameter model, by turn of month (last trading day and first three trading days of each month)
versus all other days in the year, for 1963 to 1985 as well as subperiods. The equation being estimated is:
Rp, = zot
Averaged over All

Days in
Avg. Rate of Return

on Market Index
Turn of month
1963-1985
Rest of year
1963-1985
Turn of month
1963-1972
Rest of year
1963-1972
Turn of month
1973-1985
Rest of year
1973- 1985
0.00201***
(8.11570)
0.00045***
(4.14785)
0.00213***
(6.255 14)
0.00034*
(2.13101)
0.00 192***
(5.45677)
0.00054***
(3.60257)
+ ' Id
I pi-I + (-Pt
Avg. Intercept
Coefficient (%o)
0.00075***
(4.85871)
0.00025***
(3.58906)
0.00062**
(2.73442)
0.00025*
(2.30116)
0.00086***
(4.03915)
0.00026**
(2.75478)
Avg. Slope
Coefficient (Ci)
Sample
Size
0.00 111***
(4.09492)
0.00016
(1.28888)
0.00139***
(3.30974)
0.00014
(0.68770)
0.00090**
(2.52501)
0.00018
(1.13188)
1104

4674
480
2013
624
2661
1555
TABLE 11
of the two-parameter model, by turn of the month (last trading day and first three trading days of each month)
and part of the week. The equation being estimated is:
Rp YO,= + Yii pi-l +(-P1 .
Averaged over All

Days in
Avg. Rate of Return

on Market Index
Mondays at turn of
month
Tuesdays-Fridays at
turn of month
Mondays in rest of year
-0.00008
(-0.13101)
0.00250***
(9.39952)
-0.00133
(-4.66774)
0.00089***
(7.64172)
Tuesdays-Fridays in
rest of year
Avg. Intercept
Coefficient (-%)
0.00148
(4.19198)
0.00058***
(3.39182)
0.00050***
(3.10427)
0.00019**
(2.47013)
Avg. Slope
Coefficient (l)
Sample
Size
-0.00178
(-2.60645)
0.00 178***
(6.13503)
-0.00178
(-5.93590)
0.00063***
(4.61088)
208
896
910
3764
1985. During these periods, returns were high and risk was rewarded. Table 12 presents
a comparison between the turn of the month, the turn of the year and the rest of the
year in a dummy variable framework using data from January 1963 to December 1985.
The last day of December and the first three days of January are considered part of the
turn of the year but are excluded from the turn-of-the-month data for this purpose. The
results show that both the average rate of return and the estimated risk premium are
significantly higher at the turn of the year than at the turn of the month. Both returns
and the estimated risk premium are significantly lower during the rest of the year than
at the turn of the month with the last day of December and the first three days of January
excluded.
The results reported here do not explain calendar effects on stock market returns.
Furthermore, they must be interpreted cautiously due to the potential biases outlined
above. However, they do allow the initially startling results of Tinic and West ( 1984),
which suggest that a positive risk premium exists only during January, to be seen in some
TABLE 12
Differences in returns on the equally weighted index (RME), %oand jj, with
turn of the month (last trading day and first three trading days of each month
excluding those days at the turn of the year) as intercept, one dummy variable
for the turn of the year (December 24 to January 28) and a second dummy
variable for all other days in the year. The estimated equations are:
3
RME = 01 + Z OiDi+ c1,
'jt= 01+ Z OiDi+?j,
i=2
i=2
with]j = O,1, respectively. The intercept representsthe turn of the month (last
trading day and first three trading days of each month) except for those days
falling at the turn of the year, D2 representsthe turn of the year (December 24
to January 28) and D3 represents all other days in the year.
Variable
RME
0.00133***
(5.594)
0.00229***
(5.691)
-0.00110***
(-4.124)
0
0
(i )
(io)
0.00051
(3.334)
0.00023
(0.887)
-0.00025
(- 1.484)
0.00089**
(3.276)
0.00105*
(2.289)
-0.00089**
(-2.930)

CHARLES BRAM CADSBY
1556
perspective. There are many ways of partitioning the days of the year. However they are
partitioned, days during which the stock market did well also exhibit a significant return
to risk in this study. This is not surprising. High beta portfolios should do exceptionally
well when the market does well, exceptionally poorly when the market does poorly, and
not much differently than the market when market returns are close to zero. The real
puzzle is not that the estimated CAPM risk premium is significant only during periods
when the stock market does well, of which January in the United States over the Tinic
and West ( 1984) estimation period is but one example. On the contrary, the puzzle and
the challenge to the notion of market efficiency is posed by the various calendar effects
on the returns themselves.
4. The Four-Parameter Case
Fama and MacBeth ( 1973) and Tinic and West ( 1986) used portfolios based on rank
ordering of betas as in the two-parameter case to estimate the four-parameter model in
Equation (5) below as a further test of the CAPM.
+ 71ftp-l
Rp,`=:0Yo?
?
+
2t3t-1
+ 73tS(ept-1)
(5)
+ Ept,
where 32t-1 is the average of the squares of the individual p3icoefficients and S(ept-1) is
the average of the individual specific risk coefficients of securities in portfolio p, calculated
over the portfolio estimation period.8 Fama and MacBeth (1973) argued that the twoparameter CAPM predicts that the average values of neither ^Y2nor ^y3should be signifTABLE 13
Average value of the coefficients of the four-parametermodel. The equation being estimated is:
Rp=
Yot + }'Yif3P-l+ -Y210pI-1 + Y3,S(ep,_1) + yp.
One-tailed tests are used for %o,j, and 3 and two-tailed tests are used for i2 in Tables 13, 14, 15 and 16.
Averaged over All

Days in year
Days in January
Days in February-December
Days between December 24January 28
Days between January 29December 23
Mondays
Tuesdays to Fridays
Mondays at turn of year
Tuesdays-Fridays at turn of
year
Mondays in rest of year
Tuesdays-Fridays in rest of
year
(io)
(i 1)
0.0003
(1.0029)
0.0022*
(2.3143)
0.0028***
(3.8748)
0.0024**
(2.6989)
0.0000
(0.1055)
-0.0000
(-0.0714)
0.0003
(1.1878)
0.0025
(1.2318)
0.0024**
(2.3995)
-0.0003
(-0.4624)
0.0001
(0.3832)
0.0004
(1.4446)
-0.0000
(-0.0384)
-0.0001
(-0.1530)
0.0002
(0.1467)
0.0005
(1.4758)
-0.0003
(-0.4367)
0.0006*
(1.9169)
0.0024
(1.0500)
-0.0004
(-0.3389)
-0.0006
(-0.7592)
0.0007*
(2.1548)
(i2)
-0.0002
(-0.9991)
0.0004
(0.5682)
0.0008
(1.5059)
0.0002
(0.2643)
-0.0002
(-1.1544)
0.0000
(0.0807)
-0.0002
(-1.1860)
-0.0009
(-0.6894)
0.0004
(0.5853)
0.0001
(0.2808)
-0.0003
(-1.4868)
(i3)
0.0121
(0.7920)
0.0138
(0.2609)
-0.0258
(-0.5835)
0.0189
(0.3682)
0.0114
(0.7118)
-0.0393
(-1.0826)
0.0244
(1.4509)
-0.0975
(-0.7981)
0.0468
(0.8294)
-0.0332
(-0.8732)
0.0221
(1.2522)
Sample
Size
5778
489
660
548
5230
1118
4660
106
442
1012
4218
8 Tinic and West ( 1986) also look at a five-parameter model which includes firm size as an explanatory
variable. Unfortunately, data on firm size were not available to the author.

1557
icantly different from zero and obtained this result when averages were calculated across
their entire data set. The results of Tinic and West ( 1986) varied according to subperiod.
However, in general, the average value of 7j3 alone was significant in January while the
average values of 1 and sometimes ^Y2were significant during the rest of the year.
Table 13 reports results using daily data from January 2, 1963 to December 31, 1985
by turn of the year (December 24 to January 28) and time of the week. The results are
somewhat different than those reported by Tinic and West (1986). Nothing is significant
when averages are taken over all days in the year together. The coefficient representing
the average return on a zero-beta portfolio is significant only in January and during the
previously defined turn-of-the-year period. Neither -71, j2 nor 3 iS significant when
Mondays are included in the averages.However, -j1 is significantlypositive from Tuesdays
to Fridays while the other risk parameters are not significantly different from zero. Thus,
once again, the CAPM looks better on non-Mondays.
When Tuesdays to Fridays at the turn of the year are compared with Tuesdays to
Fridays during the rest of the year, the results are surprising, though not entirely unlike
those reported by Tinic and West (1986) for January versus the rest of the year. None
of the risk parameters is significant at the turn of the year. During the rest of the year,
the CAPM risk parameter, ^Ylis significantly positive. However, the turn of the year is
not unique in this respect. Table 14 reports results for Tuesdays to Fridays by turn of
the year and month, where the last three days in January are incorporated into February
and where December includes only those days in December ( 1-23 ) not already included
TABLE 14
Average values of the coefficients of the four-parameter model, averaged over all days between Tuesday and
Friday, by turn of the year (December 24 to January 28) and by month (February includes January 29 to
January 3 1, December is December 1 to December 23). The equation being estimated is:
Rp,='ot
Averaged over All
Tuesdays-Fridays during
Turn of year (December
24-January 23)
February(January 24February 29)
March
April
May
June
July
August
September
October
November
December (December 1December 23)
Id3tpt-l +
21dpi-1 + Y3tS(ep,_1)+ (pl,
(o)
(1)
(2)
0.0024**
(2.3995)
0.0006
(0.6989)
0.0004
(0.3856)
-0.0001
(-0.1513)
0.0006
(0.6298)
-0.0008
(-0.9273)
-0.0011
(-1.2578)
0.0013
(1.3814)
0.0017*
(1.8555)
0.0004
(0.4576)
-0.0002
(-0.1852)
-0.0022
(-1.9469)
-0.0004
(-0.3389)
-0.0002
(-0.2241)
0.0011
(1.0120)
0.0018
(1.6161)
-0.0001
(-0.0487)
0.0015
(1.3711)
0.0012
(1.0470)
-0.0004
(-0.3357)
-0.0003
(-0.2350)
0.0007
(0.5846)
0.0007
(0.5511)
0.0026*
(1.9530)
0.0004
(0.5853)
0.0004
(0.6860)
-0.0003
(-0.4153)
-0.0006
(-0.8577)
0.0001
(0.1148)
-0.0008
(-0.3028)
-0.0011
(-1.7007)
0.0008
(1.1120)
0.0007
(1.0700)
-0.0005
(-0.6815)
-0.0005
(-0.7323)
-0.0020*
(-2.5564)

(i3)
0.0468
(0.8294)
-0.0060
(-0.1098)
0.0033
(0.0574)
0.0173
(0.2727)
-0.0007
(-0.0136)
0.0468
(0.8513)
0.0888
(1.5839)
-0.0217
(-0.3803)
-0.0764
(-1.3981)
-0.0003
(-0.0053)
-0.0953
(1.4574)
0.1331 *
(1.8421)
Sample
Size
442
405
401
377
402
391
386
403
390
403
361
299
CHARLES BRAM CADSBY
1558
TABLE 15
Average values of the coefficients of the four-parametermodel, by turn of the year (December 24 to January
28) and by month (February includes January 29 to January 31; December is December 1 to December 23).
The equation being estimated is:
Rp =
Averaged over All Days
during
Turn of year (December
24-January 21)
February (January 24February 28)
March
April
May
June
July
August
September
October
November
December (December 1December 23)
Yoi +
Yii/pi-1
'Y21fp'-I
+ y3IS(epl1) + yp.
(io)
(S I)
0.0024**
(2.6989)
-0.0004
(-0.5311)
0.0000
(0.0430)
0.0001
(0.0468)
0.0006
(0.7273)
0.0002
(0.2440)
-0.0011
(-1.3267)
0.0010
(1.2087)
0.0010
(1.1287)
0.0007
(0.8431)
-0.0002
(-0.1921)
-0.0022
(-2.2053)
0.0002
(0.1467)
0.0001
(0.1375)
0.0015
(1.6260)
0.0007
(0.6713)
-0.0004
(-0.3692)
-0.0009
(-0.7489)
0.00 17
(1.5773)
-0.0003
(-0.2792)
0.0001
(0.1522)
0.0006
(0.6271)
-0.0004
(-0.3415)
0.0029**
(2.4802)
(i2)
0.0002
(0.2643)
-0.0001
(-0.2510)
-0.0005
(-0.8964)
-0.0000
(-0.0648)
0.0003
(0.5 166)
0.0003
(0.4269)
-0.00 11 *
(-1.9642)
0.0006
(0.8971)
0.0002
(0.3020)
-0.0003
(-0.4679)
-0.0002
(-0.2717)
-0.0019**
(-2.7914)
(i3)
0.0189
(0.3683)
0.0365
(0.7307)
-0.0035
(-0.0678)
0.0066
(0.1176)
-0.0352
(-0.6996)
0.0318
(0.6172)
0.0460
(0.8777)
-0.0279
(-0.5461)
-0.0405
(-0.7840)
-0.0302
(-0.5934)
0.0870
(1.4929)
0.0754
(1.1898)
Sample
Size
548
488
502
476
487
489
480
505
466
502
458
375
TABLE 16
Average values of the coefficients of the four-parameter model, by December period just prior to turn of the
year (December 24 to December 23) and part of the week. The equation being estimated is:
Rp, =Yo, +
Averaged over All
'YI,f3-1
(%o)
Days from December 1December 23

Mondays from December 1December 23
Tuesday-Friday from
December 1-December
23
Days from December 24November 30
Mondays from December
24-November 30
Tuesday-Friday from
December 24-November
30
-0.0022
(-2.2053)
-0.0021
(-1.0414)
-0.0022
(-1.9469)
0.0004
(1.6195)
0.0001
(0.1563)
0.0005*
(1.7716)
Y213p-1
+ Y3S(epI1) + yp.
(i I)
(i2)
0.0029**
(2.4802)
0.0041*
(1.6564)
0.0026*
(1.9530)
-0.0019**
(-2.7914)
-0.0015
(-1.1142)
-0.0026*
(-2.5564)
0.0754
(1.1898)
-0.1515
(-1.1850)
0.1331*
(1.8421)
-0.0001
(-0.3427)
0.0001
(0.3135)
-0.0001
(-0.5677)
0.0077
(0.4902)
-0.0311
(-0.8226)
0.0170
(0.9822)
0.0003
(0.8590)
-0.0007
(-0.8126)
0.0005
(1.4646)

(i3)
Sample
Size
375
76
299
5403
1042
4361
1559
in the turn of the year. None of the risk parameters is significant in any month with the
exception of that part of December prior to the turn-of-the-year period. On Tuesdays to
Fridays from December 1 to December 23, I's,'Y2 and '3 are all significant.
Table 15 is similar to Table 14 except that Mondays are included. This causes 'Y2 to
attain significance in July and 3 to lose significance in December. However, the conclusion is similar to that of Table 14. As far as the relation between risk and return in
the four-parameter model is concerned, it is not the turn of the year but the period just
prior to it, December 1 to December 23, which is different from the rest of the year.
Finally, Table 16 reportsresults relatedto the interactionbetween the part of December
prior to the turn of the year and part of the week. These results show that while '7y is
significant during the reported December period not only from Tuesday to Friday but
on Mondays as well, it is not significant when this period of just over three weeks is
removed from the data. The average ^yrisk premium is negative on Mondays and nears
significance when Mondays are removed from the data. However, even in this case,
neither wy
I nor any of the other risk parameters is significant.
5. Conclusion
The most important new results contained in this paper include the following. First,
in contrast to Tinic and West (1984), the CAPM risk premium is significant both in
January and during the rest of the year from January 1963 to December 1985. Second,
the January Effect is really a Turn-Of-The-Year Effect, where the turn of the year runs
from about December 24 to January 28. The CAPM risk premium is significant at the
turn of the year as defined above but not during the rest of the year. Third, for each
calendar effect on stock returns there is a corresponding calendar effect on the risk-return
relationship. In particular, estimates of the CAPM risk premium are positive and significant during periods such as the turn of the year, the turn of the month, and the latter
part of the week in which stock returns do particularlywell. The Tinic and West (1984)
result is but one example of this phenomenon. Fourth, when Mondays are removed
from the data the estimated CAPM risk premium is positive and significant even over
non-turn-of-the-year or non-turn-of-the-month periods. Fifth, when the four-parameter
model is estimated without Mondays, the CAPM risk premium, j'I, is significant while
the other measures of risk are not. However, neither the CAPM risk premium nor any
of the other measures of risk are significant at the turn of the year. Sixth, in the context
of the four-parameter model, the CAPM risk premium is significant from December 1
to December 23. It is not significant-during any other month or during the rest of the
year. The other measures of risk are also insignificant during the rest of the year.
These results must be interpretedwith caution because the estimation procedures used
to facilitate comparability with earlier studies are flawed in a number of respects. I am
currently working on a study (joint with Elizabeth Maynes of York University) which
considers the robustness of these results to methodological changes designed to reduce
biases emanating from the bid-ask effect, nonsynchronous trading and the other possible
sources discussed above.
However, the two-parameter model results contained in this paper do suggest that
calendar effects on the risk-returnrelationship may be closely related to calendar effects
on measured stock returns themselves.9 Ritter and Chopra (1989) present additional
evidence in support of this conclusion. Noting that it is the returns for small firms that
are substantially higher in January than during the rest of the year, they proceed to
demonstrate that it is only for such small firms that the risk-return relationship is sig9 Corhay, Hawawini and Michel ( 1987) appear to find some evidence to the contrary in the cases of the
United Kingdom, France and Belgium.

CHARLES BRAM CADSBY
1560
nificantly positive in January.This interaction of firm size with the Januaryeffect provides
an additional example of the close link between anomalously high measured returns and
a significant risk-return relationship, similar to the examples documented in this study.
Thus, the importance of the calendar to an individual stock or portfolio appears to be
directly related to the level of market risk associated with that stock or portfolio. The
fact that statistical investigations cannot find a significantly positive relationship between
risk and return during time periods when market returns are low or even negative is
consistent with the CAPM. For example, high beta stocks should do particularly badly
on days when the market return is negative because that is precisely what "high beta"
means. The fact that market risk is penalized on such days is not anomalous. The anomaly
is not in the risk-return relationship but in the returns themselves.'0
10The author thanks MurrayFrank, Robert Grauer,ElizabethMaynes, Ieuan Morgan, FrancisTapon, William
Ziemba, two anonymous refereesand participantsin workshops at the University of Guelph, Queen's University
and the 1989 Northern Finance Association meetings at Ottawa for their helpful comments and suggestions.
The author also acknowledges the careful and skilled researchassistance of Sydney Allan. A substantial portion
of this research was completed while on sabbatical leave at Queen's University. The author is grateful to the
Department of Economics at Queen's for their support and hospitality. Funding provided by the Office of
Research at the University of Guelph through a block grant from the Social Sciences and Humanities Research
Council of Canada is acknowledged with gratitude.
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The CAPM and the Calendar: Empirical Anomalies and the Risk-Return Relationship

Author(s): Charles Bram Cadsby

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