The January Effect Revisited

Pietranico, Paul-Charles; Riepe, Mark W.
April 2004
Journal of Financial Planning;Apr2004, Vol. 17 Issue 4, p26
Academic Journal
The article analyzes several hypotheses explaining the reasons behind the occurrence of the January effect or the tendency for stocks, particularly those of small companies, to do exceptionally well during the month of January. At least ten different reasons have been given for why this might occur, although literature suggests that researchers are converging on the tax-loss selling, window dressing or performance hedging hypotheses as the leading candidates. The tax-loss selling hypothesis is based on the belief that year-end tax-loss selling causes stock prices to be depressed in December and then bounce back in January. The window dressing hypothesis posits that portfolio managers reconfigure their portfolios in anticipation of year-end reporting. They do so by selling off stocks that have done poorly and buying stocks that either have done well, or have names familiar to their clients. According to the performance hedging hypothesis, portfolio managers are often compensated based on their returns over and above a specified benchmark. In the event that their returns exceed that of the benchmark at some point in the year, this hypothesis suggests that they will reconfigure their portfolio to become more benchmark-like for the balance of the year.


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