OR Practice—Playing the Turn-of-the-Year Effect with Index Futures

The “turn-of-the-year” effect is a well-documented stock market phenomenon in which low capitalization “small stocks” receive relatively higher returns than high capitalization “big stocks” on the last trading day of December and the first 8 trading days of January. The difference in returns during this period is of the order of 10%. Strategies for buying and selling these small stocks may be profitable, but may also incur large transaction costs that eliminate most or all of the projected gains. In this paper, we show a preferable way to invest in order to exploit this anomaly: use a futures spread that is long in the small stocks and short in the big stocks. The optimal investment, which uses a modification of the capital growth criterion, is large and has a substantial expected gain with minimal risk. We have used this analysis successfully in managing investment accounts.