January Effect
Lee Biggerstaff
What is the January Effect?

Market anomaly dealing with stocks with low
market capitalization

These stocks do exceptionally well in the first
weeks of January
Possible Explanations

Tax-loss Selling Hypothesis

Window Dressing Hypothesis

Performance Hedging Hypothesis
Tax-Loss selling

Investor’s dump stocks to realize losses that
offset gains to save on taxes

Investor’s repurchase the stocks in the first
week in January
Window Dressing

Fund Managers reconfigure their portfolios in
anticipation of year-end reporting

Sell poor performers and buy good
performers or stocks with familiar names
Performance Hedging

Managers compensated for returns over and
above a benchmark

Dump risky stocks once benchmark has
been reached, pick them back up in January
after bonus has been paid
Continued Presence?

January Effect only seems to exist today in
the smallest stocks (Smallest 10%)

Hard to exploit because it doesn’t happen
every year
Conclusion

The smallest stocks by market capitalization
still exhibit a statistically significant January
Effect

90% of traded securities are not affected by
the January Effect