BROWSE

January Effect

Definition

The January effect is a hypothesis that there is a seasonal anomaly in the financial market where securities' prices increase in the month of January more than in any other month. This calendar effect would create an opportunity for investors to buy stocks for lower prices before January and sell them after their value increases. As with all calendar effects, if true, it would suggest that the market is not efficient, as market efficiency would suggest that this effect should disappear.

What is the 'January Effect'

The January effect is a seasonal increase in stock prices during the month of January. Analysts generally attribute this rally to an increase in buying, which follows the drop in price that typically happens in December when investors, engaging in tax-loss harvesting to offset realized capital gains, prompt a sell-off. Another possible explanation is that investors use year-end cash bonuses to purchase investments the following month.

Explaining 'January Effect'

The January effect is a hypothesis, and like all calendar-related effects, suggests that the markets as a whole are inefficient, as efficient markets would naturally make this effect nonexistent. The January effect seems to affect small caps more than mid or large caps. Since the beginning of the 20th century, the data suggests that these asset classes have outperformed the overall market in January, especially toward the middle of the month.

Studies and Criticism

One study, analyzing data from 1904 to 1974, concluded that the average return for stocks during the month of January was five times greater than any other month during the year, particularly noting this trend existed in small-capitalization stocks. The investment first Salomon Smith Barney performed a study analyzing data from 1972 to 2002 and found that the stocks of the Russell 2000 index outperformed stocks in the Russell 1000 index (small-cap stocks versus large cap stocks) in the month of January. This outperformance was by 0.82%, yet these stocks underperformed during the remainder of the year. Data suggest that the January effect is becoming increasingly less prominent.


Further Reading


Anomalies: the January effect
www.aeaweb.org [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

The other January effectThe other January effect
www.sciencedirect.com [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

The January effect: Still there after all these yearsThe January effect: Still there after all these years
www.tandfonline.com [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

Can tax-loss selling explain the January effect? A noteCan tax-loss selling explain the January effect? A note
www.jstor.org [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

The declining January effect: evidences from the US equity marketsThe declining January effect: evidences from the US equity markets
www.sciencedirect.com [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

Testing for the existence of the 'January effect'in transition economiesTesting for the existence of the 'January effect'in transition economies
www.tandfonline.com [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

Investor optimism, false hopes and the January effectInvestor optimism, false hopes and the January effect
www.tandfonline.com [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …

The other January effect: International evidenceThe other January effect: International evidence
www.tandfonline.com [PDF]
… 1999. The January effect and monthly seasonality in the Hang Seng index: 1985-97. Applied Economics Letters 6:2, 121-123 … Applied Economics Letters 4:5, 297-299. [Crossref] 113 … A Test for Seasonal Stability. Journal of Business & Economic Statistics 13:3, 237-252 …



Q&A About January Effect


What are some explanations for why there may be more buying at this time of year?

One study, analyzing data from 194 to 1974, concluded that the average return for stocks during the month of January was five times greater than any other month during the year, particularly noting this trend existed in small-capitalization stocks. The investment first Salomon Smith Barney performed a study analyzing data from 1972 to 22 and found that the stocks of the Russell 2 index outperformed stocks in the Russell 1 index (small-cap stocks versus large cap stocks) in the month of January. This outperformance was by .82, yet these stocks underperformed during remainder of year. Data suggest that increasing correlation between markets has diminished returns on both small and large caps since then."

What is the January Effect?

The January effect is a seasonal increase in stock prices during the month of January.

When does the January Effect occur?

The January effect occurs during the month of January.

Why does the January Effect occur?

Analysts attribute this rally to an increase in buying, which follows a drop in price that typically happens in December when investors engage in tax-loss harvesting to offset realized capital gains. Another possible explanation is that investors use year-end cash bonuses to purchase investments the following month.