Seasonal Effects on Stock Market Volatility: Evidence from S&P 500 index options

Abstract

The purpose of this study is to observe seasonal effects in volatility implied by the option prices. If seasonal effects are found in the data, then it confirms the efficient market theory, as the risk changes over time and the higher returns for some particular month, day or week can only be a result of higher risk. Another important part of this paper is to compare the seasonal effects in different market conditions.

An issue that has been the subject of intense debate among academics and financial professionals recently is the Efficient Market Hypothesis (EMH). If the markets were efficient, there would be no possibility to find any strategy to outperform the markets without assuming more risk. The concept of Efficient Markets is a key concept in this study.

The results show that for the January effect we cannot find any statistically significant seasonal variation in any kind of market conditions. The day of the week effect tests show statistically significant results, that is, that the volatility rises on Monday and decreases on other week days. The changes are more drastic when there is high volatility market condition. For further study, a different approach for January seasonal effect could be applied in order to find statistical significance.