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Concept of January Anomaly

Essay by   •  September 9, 2012  •  Essay  •  337 Words (2 Pages)  •  1,316 Views

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The January anomaly is said to be primarily a low-share price effect more so than a market value effect. Most stocks in general, and more so small stocks in particular, have historically generated abnormally high returns in the month of January. Robert Huagen and Philippe Jorison have this to say regarding the abnormal return, "The January effect is, perhaps the best known example of anomalous behavior in security markets throughout the world". What seems to be predominantly fascinating is that this trend has always been visible and it simply doesn't appear to be diminishing despite the fact that is well known, recognized worldwide, and made known for almost two decades. By nature in most cases, or theoretically speaking, an anomaly would disappear after some time because traders attempt to take advantage of it in advance. The basic concept behind the January anomaly is that January has been proven the best month to be invested in stocks, as evident with stock market indexes.

The effect of the January anomaly is most cases can be accredited to smaller stocks rebounding following the year end tax selling. Individual stocks which are depressed near year-end are more likely to be sold for tax-loss recognition while stocks that have run up are often held until after the new year.

Evidence of studies in foreign countries suggests that returns gained in January were greater than the average return for the entire year. Interestingly enough, the January effect has also been observed in many foreign countries (e.g. Australia and Great Britain) that don't use December 31st ad the tax year end, which then proves the point that there is more to the theory than just tax effects.

Today there is an argument for the movement in abnormal returns. Many people believe that the January effect has indeed moved into the month of November and December because of mutual funds having to report its holdings at the end of October and from investors buying in anticipation of gains in January.

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