January Effect - a Re-Examination

Abstract

The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window-dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has been presented in support of a particular hypothesis though the same evidence may be consistent with more than one hypothesis. Furthermore, prior work has not adequately controlled for the bid-ask bounce. In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other possible explanations.