The January effect

[Cyrus]

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Calendar effects on the market *

Rozeff and Kinney (1976) have found that there were seasonal patterns in an equal-weighted index of the NYSE prices over the period 1904-1974. Specifically, the returns in January were much higher than in other months. The average monthly return in January was about 3.5%, while other months averaged about 0.5%. The equally weighted index suggests that this is primarily a small company effect.

Banz (1981), Donald Klein (1983), and others have indeed confirmed that the excess returns on small companies were temporally concentrated. Half of the excess returns came in January, and half of the January returns came in the first five trading days. Thus the high returns in January for the equally weighted NYSE index are driven by high returns to small firms in January. Reinganum (1983) clarified further by pointing out that the January returns were higher for small companies that had lost value during the previous year, while excess returns in the first five trading days were not observed for small 'winners'.

Tonic and West (1984) have re-evaluated the CAP model to see if there are any seasonal patterns to risk premia and discovered that the observed return to riskier (higher beta) stocks occurs exclusively in January. Klein (1986b) found that the highest returns are associated with companies that pay no dividends.

Various explanations (e.g. tax window dressing, etc) have been provided for such phenomena. However, the challenge to economists is still on. This is a phenomenon that persists for at least 90 years, and for at least 50 years after its existence has been identified and published.

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Happy holidays and happy hunting!..

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* The Winner’s Curse, 1992

[Mason Malmuth]

Hi Cyrus:

This is also true in our business. What happens is that the big chain stores like Borders and Barnes &amp; Noble usually try to get their inventories down at the end of the year after stocking up for Christmas sales. So in the past, every January has been very good for us. We expect this January to be the same.

Best wishes,
Mason

[zerosum]

The January effect has actually shifted into December, given greater mutual fund assets in the past decade than during the time periods examined by the authors you cite.