The January Effect: Theory and Evidence of an Equity Market Irregularity

Abstract

The January Effect is the abnormal behavior of small firms to have greater returns in January than larger firms. In this paper the pros and cons of several theories are reviewed in attempts to locate the one with the most explanatory answer. After looking at theory, we move on to profitable opportunities that it presents and find that there are ways to take advantage of the January Effect with futures which yield some nice returns. However, we also note that in the last decade the January Effect has gravitated towards December, an important note for investors. Finally we return to the theory and attempt to prove the tax-loss selling hypothesis with an example using stock returns from the UK, and found no evidence of a January Effect overseas.