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Research documents higher stock returns in November through April than for the rest of the year. This anomaly is known as the “Halloween effect” and results in the following trading rule: sell stocks in early May, invest in T-bills, and re-invest in stocks on Halloween. In contrast to recent studies, we show that the Halloween effect is robust to consideration of outliers and the “January effect.” Additionally, we show that investing in a “Halloween portfolio” provides risk-adjusted returns in excess of buy and hold equity returns even after consideration of transaction costs.

The “Halloween effect,” identified by Bouman and Jacobsen (2002), is an equity return anomaly in which the months of November through April provide higher returns than the remaining months of the year. This effect, if real, is perhaps of greater interest to investors than most other anomalies because the trading rule is simple to implement with low transactions costs, making exploitation of this anomaly potentially profitable. More recent studies posit that this anomaly might be driven by outliers or is simply the “January effect” in disguise. In this study, we examine the robustness of the Halloween effect to the consideration of outliers and the January effect. We also construct mean-variance efficient portfolios to determine whether investing in a Halloween portfolio can result in risk-adjusted returns superior to those of a buy-and-hold market portfolio. Finally, we examine the impact of transaction costs on the returns to investing in a Halloween portfolio.

In this study, we show that the Halloween effect in U.S. returns is significant in the period 1954–2008, but not before. Anomalies usually are present only in older data, given that they can be exploited for profit by savvy investors once they are identified. This does not appear to be the case with the Halloween effect. We also show that the Halloween effect is robust to consideration of outliers, the January effect, and transactions costs. Some anomalies, such as those related to weather, would require many transactions per year and a touch of clairvoyance to exploit, making profitability from exploitation of these anomalies questionable. By contrast, the Halloween effect is an especially attractive anomaly for investors, given the low number of transactions required and the easily predictable dates of those transactions. The greater risk-adjusted returns available by investing in a Halloween portfolio are a challenge to the efficient markets hypothesis. Further research is needed to reconcile these results with rational human behavior.