I am reading a report which talks about seasonality. There is a chart showing the average returns for each month of the year. In the chart it appears the last 3 months of the year tend to be negative.
Then they say 'to check if this is due to the timing of various crises or bubbles we have fitted a generalized additive model (GAM) to the returns time series of each stock,
Rij = Fi(t) + month(t) + Eit please note i, j & t (when not in brackets) are subscripts
Fi(t) is an arbitrary but smooth function.
The two charts show the same pattern.
I have to be honest I have not come across GAM (or am unaware I have used it before). I do not understand the use of this GAM & how they have just picked some arbitrary function and this proves their point?