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Payday Anomaly

Last Updated on 10 February, 2024 by Rejaul Karim

In the research paper “Payday Anomaly,” Aixin (James) Ma and William R. Pratt explore the captivating pattern of abnormal returns in financial markets around the turn of calendar months. Existing research has associated this phenomenon with month-end paychecks, as employees regularly contribute a substantial portion of their earnings to retirement accounts, resulting in automatic investments in the market.

The authors further examine the impact of semi-monthly pay schedules on mid-month market movements. Interestingly, they discover that the 16th day of the month yields better performance compared to other calendar days, except for the 1st and 2nd. However, as more institutions transition to bi-weekly pay schedules, the relevance of this mid-month payday anomaly seems to be gradually diminishing.

By linking financial market trends with payroll practices, Ma and Pratt’s study offers valuable insights into abnormal returns and overall market efficiency.

Abstract Of Paper

Abnormal returns have been found on days near the turn of the calendar months. Previous studies have linked the phenomenon to month-end paychecks, of which a sizable proportion goes into employees’ retirement accounts and is then automatically invested in the market. Since many institutions adopt a semi-monthly pay schedule, we test the hypothesis that the market should exhibit detectable mid-month abnormal movement. Our results indicate that the 16th day of the month statistically and economically outperforms all other calendar days except the 1st and 2nd. As more and more institutions transition into bi-weekly pay schedule, however, the mid-month payday anomaly becomes less prominent.

Original paper – Download PDF

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Author

Aixin (James) Ma
Oklahoma City University – Meinders School of Business

William R. Pratt
Oklahoma City University

Conclusion

In conclusion, the research paper “Payday Anomaly” by Aixin (James) Ma and William R. Pratt delves into the fascinating world of abnormal returns observed near the turning points of calendar months.

These anomalies have been previously linked to month-end paychecks, as employees allocate a significant portion of their income to retirement accounts, which automatically invest in the market. With many institutions adopting semi-monthly pay schedules, the authors test the hypothesis of detectable mid-month abnormal market movements.

Their findings reveal that the 16th day of the month demonstrates notable statistical and economic performance, surpassing all other calendar days except the 1st and 2nd. Nonetheless, as institutions increasingly adopt bi-weekly pay schedules, the prominence of the mid-month payday anomaly appears to be diminishing.

This compelling study sheds light on the interplay between payroll practices, market fluctuations, and the overall efficiency of financial markets.

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FAQ

Q1: What is the main focus of the research paper “Payday Anomaly” by Aixin (James) Ma and William R. Pratt?

The paper explores the phenomenon of abnormal returns around the turn of calendar months, known as the “Payday Anomaly.” It investigates the relationship between abnormal market movements and month-end paychecks, where a substantial portion of employees’ earnings is invested in the market through retirement accounts.

Q2: How does the study examine the impact of semi-monthly pay schedules on market movements?

The authors test the hypothesis that, due to semi-monthly pay schedules adopted by many institutions, there should be detectable mid-month abnormal market movements. The research specifically looks at the 16th day of the month and compares its performance with other calendar days.

Q3: What are the key findings regarding the mid-month payday anomaly?

The study reveals that the 16th day of the month statistically and economically outperforms other calendar days, except for the 1st and 2nd. This supports the existence of a mid-month payday anomaly. However, the authors note that as more institutions transition to bi-weekly pay schedules, the significance of this anomaly seems to be diminishing.

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