Infrequent rebalancing, risk deferral, and equity returns at the turn of the month

We examine equity returns at the turn of the month using return data from thirty countries over the thirty-year period from January 1, 1994, to December 31, 2023. Our analysis reveals that the mean daily return on trading days surrounding the end of the month is significantly larger at 10 bps across the markets examined as compared to 0 bps on other days, with a narrow window bracketing month-ends accounting for all or nearly all positive mean return in each of the countries examined. Linking this pattern to the interaction between slow moving institutional capital and market frictions, we provide evidence in line with the idea that the observed pattern might be sustained by a dual-channel mechanism. First, the effect appears to be amplified hierarchically due to overlapping rebalancing mandates, peaking at lower frequencies due to the synchronization of a larger number of rebalancing schedules. Second, and more importantly, the effect also seems to be conditioned by the deferral of risky investments to structured rebalancing nodes during periods of market distress. Consistent with this mechanism, its magnitude is significantly larger after periods of market turbulence and during recessions, when investors are likely to store more cash in safe assets. Our findings thus provide a robust economic framework for understanding the enduring presence of the turn-of-the-month effect, suggesting that it may emerge as a joint consequence of infrequent rebalancing and risk deferral.