Are return seasonalities due to risk or mispricing?

Abstract

Stocks tend to earn high or low returns relative to other stocks every year in the same month (Heston and Sadka, 2008). We show these seasonalities are balanced out by seasonal reversals: a stock that has a high expected return relative to other stocks in one month has a low expected return relative to other stocks in the other months. The seasonalities and seasonal reversals add up to zero over the calendar year, which is consistent with seasonalities being driven by temporary mispricing. Seasonal reversals are economically large and statistically highly significant, and they resemble, but are distinct from, long-term reversals.