Journal of Investment Strategies

Risk.net

Portfolio rebalancing and seasonality in Canadian financial markets

George Athanassakos

  • For the period 1957–2018 and subperiods, this paper provides evidence in support of portfolio rebalancing. Seasonal strength was observed in Canadian equities, especially smaller-cap stocks, at the beginning of the year, with the rest of the year, especially the second half, showing widespread weakness in relation to January. The opposite was true for Government of Canada bonds, as portfolio rebalancing would predict.
  • The paper also provides support for the expression "sell in May and go away", as the average performance of risky securities was higher in the November to April period than the May to October period. The opposite was true for risk-free bonds. This evidence is also consistent with portfolio rebalancing.
  • Had investors invested consistently in risky securities in November to April for the last 60 years and rebalanced their portfolios out of risky securities and into government bonds for the remaining annual period, they would have outperformed the market by a significant margin.
  • The paper’s findings have implications for ongoing research on the drivers of the return seasonality in financial securities. The seasonality in government bond returns evident in this paper is not consistent with tax-loss selling. Moreover, the lack of seasonality in government bond returns in 1957–1987, when there was strong seasonality in 1988-2018, is also inconsistent with the weather-related explanations of seasonality in financial securities.

Using Canadian data for the period 1957–2018, this paper provides evidence in support of portfolio rebalancing by professional portfolio managers. We document strong seasonality in returns of Canadian stock and government bond indexes. However, the seasonality in the returns of the Canadian government bond index is opposite in direction to that of the Canadian stock index. Seasonal strength is observed in equities, especially smaller-cap stocks, at the beginning of the year, with the rest of the year, especially the second half, showing widespread seasonal weakness in relation to January. The opposite is true for Government of Canada bonds, confirming the predictions of the portfolio rebalancing hypothesis. In addition, this paper provides support for the popular expression “sell in May and go away”, as the average performance of risky securities is higher in the November to April period than in the May to October period. The opposite is true for Government of Canada bonds, which is also consistent with portfolio rebalancing. The paper’s findings will be useful not only to institutional investors but also to individual investors. Understanding the seasonal behavior of financial markets and the inefficiencies bestowed on them by institutional factors will help investors secure higher returns and a better retirement.

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