Stock market efficiency

Stock market efficiency and the summer holidays

Stock market efficiency affects the share price of firms that are listed on the stock market and therefore this topic is relevant to many businesses. Interestingly any news can affect a business’s share price irrelevant if the news is true or not. However it is implied that an efficient market should incorporate any news about a firm rationally as well as rapidly. (Glen, 2013, p. 543) What I will be touching on in this blog post is the effect the summer holidays have on the efficiency (rapidness and rationality) of the markets in the northern hemisphere. Surely stock brokers jetting off on holidays can’t impact the share price of Multinational corporations?

This issue was brought up in a recent BBC news article by Perter Day who questioned why financial markets tend to crash in early autumn with the crashes of 2008, 1987 and 1929 all happening in this period (Day, 2015). His article references the work of an MIT professor who examined this issue and called it the “September effect” (Fang, 2014). What this indicates is that investors become less informed on financial news as a result of taking time off to relax and go on holiday. This in turn reduces the levels of trade within the stock market as stock brokers don’t want make any hasty decisions that could lose them a lot of money.

The concept of the “September effect” is an adaptation of conservatism, a cognitive error within behavioural finance theory (Glen, 2013, p. 583). Investors decide to delay the decision making because they are resistant to change.  They choose to take holidays and time out from trading as a means to avoid the issues and become less informed. When trading activity goes back to normal in September, investors can no longer delay these vital decisions and often it is the case that prolonging the decision over the holiday period has resulted in exaggerated consequences and investors begin to panic. That’s when serious crashes begin to materialise. 

Now it was suggested that investors are less informed during the holiday period and that is why they refrain from making these serious decisions. However whether that is true, I am unsure. What appears to be the case, in my opinion, is that there is a degree of cognitive dissonance involved. Investors refrain from making these decisions, not because they are not well informed, but because they don’t want to spoil their period of relaxation by making the necessary decisions and then having to face the consequences.  As a result they leave things how they are and hope that the problem won’t be as bad when they have to face it in the autumn.

References

Day, P. (2015, January 18). Why stock market crashes happen in the autumn. Retrieved Feburary 22, 2015, from BBC News: http://www.bbc.co.uk/news/business-30793329

Fang, L. (2014). Newsroom. Retrieved Feburary 22, 2015, from MIT SLoan: http://mitsloan.mit.edu/newsroom/press-releases/2014-school-holiday-breaks-global-stock-lily-fang.php

Glen, A. (2013). Corporate Financial Management. Harlow: Pearson .