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- Title
THE JANUARY EFFECT: A TEST OF MARKET EFFICIENCY.
- Authors
Klock, Shelby A.; Bacon, Frank W.
- Abstract
The purpose of this study is to test the weak form efficient market hypothesis by analyzing the effects of year-end selling/buying and the January effect on stock price. Numerous past studies suggest that at year-end investors sell underperforming stocks, thus negatively impacting stock price. Past studies also suggest the repurchase of previous year losers in January causing upward pressure on stock price. According to the weak form efficient market hypothesis, it is not possible to outperform the market - adjusted appropriately for risk - by using past information embedded in the year-end or January effect. A strategy of "buying low" tax loss losers in December and "selling high" the same in January should not yield above normal returns if the market is weak form efficient. The market should adjust to this information sufficiently fast to disallow any investor's earning an above normal risk adjusted return. Similar to previous research on the January effect, evidence here observes negative year-end returns followed by positive January performance. Results suggest that underperforming stocks post abnormal negative risk adjusted returns up to 60 days prior to the last trading day of the year followed by significant positive returns during the month of January with significant positive returns commencing up to 20 days prior to year-end during 2010, 2012, and for the global sample. With return performance similar to previous studies, the market is not weak form efficient with respect to year-end selling and the January effect. Evidence here suggests a possible bargain buying response to year-end selling even before the year-end.
- Subjects
JANUARY effect (Investments); EFFICIENT market theory; STOCK prices; INVESTORS; STOCK repurchasing; ECONOMIC research
- Publication
Journal of Business & Behavioral Sciences, 2014, Vol 26, Issue 3, p32
- ISSN
1099-5374
- Publication type
Article