Seasonalities or calendar anomalies are well documented and are perhaps the
best-known examples of inefficiencies in the financial markets. It may be in terms of seasonal effects
over the day-of-the-week, the months of the year, or over specific years. Evidence of
such seasonalities is readily available for the well-established stock markets in the
developed economies, as well as in some emerging market countries. While the studies of Keim
(1983), Jaffe et al. (1985), and Ariel (1987) revealed the existence of a monthly effect on the US
and other developed markets, studies by Rozeff and Kiney (1976), Gulketin and Gulketin
(1983), Keim (1983), and Reinganum (1983) revealed the existence of a January effect, where
returns in January tend to be larger than returns in other months.
The main argument proposed is the tax-loss selling hypothesis where investors sell
in December and buy back in January such that returns are higher at the beginning of the
year. Essentially, the tax-loss hypothesis is supported in most countries where the tax year ends
in December. For instance, the months of year effect would exist if returns on a
particular month are higher than that in other months. This negates the notion of efficiency in
markets since traders are able to earn abnormal returns by examining the pattern of monthly
returns and framing trading strategies accordingly. Essentially, this entails an inefficient
market situation where returns are not proportionate with risk. |
