Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-30T18:49:22.376Z Has data issue: false hasContentIssue false
  • English
  • Français

Can Omitted Risk Factors Explain the January Effect? A Stochastic Dominance Approach

Published online by Cambridge University Press:  06 April 2009

H. Nejat Seyhun
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides a direct test of the hypothesis that large January returns can be attributed to omitted risk factors. Data from 1926–1991 show that the January return in the smallest decile of NYSE firms dominates the January returns for all other deciles by the first-order stochastic dominance. Similarly, January returns in all deciles (with the exception of ninth and tenth deciles) dominate non-January returns by first-, second-, or third-order stochastic dominance. The presence of stochastic dominance by January returns suggests that the omitted risk factors are not likely to explain the January effect.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 28 , Issue 2 , June 1993 , pp. 195 - 212
Copyright
Copyright © School of Business Administration, University of Washington 1993

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ariel, R. A. “A Monthly Effect in Stock Returns.” Journal of Financial Economics, 18 (03 1987), 161–174.CrossRefGoogle Scholar
Banz, R. W. “The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (03 1981), 3–18.CrossRefGoogle Scholar
Bawa, V.; Bodurtha, J.; Rao, M.; and Suri, H.. “On Determination of Stochastic Dominance Optimal Sets.” Journal of Finance, 40 (06 1985), 417–431.CrossRefGoogle Scholar
Berkowitz, S. A.; Logue, D. E.; and Noser, E. A.. “The Total Cost of Transactions on the NYSE.” Journal of Finance, 43 (03 1988), 97–112.CrossRefGoogle Scholar
Blume, M. E., and Stambaugh, R. F.. “Biases in Computed Returns: An Application to the Size Effect.” Journal of Financial Economics, 12 (11. 1983), 387–404.CrossRefGoogle Scholar
Branch, B. “A Tax Loss Trading Rule.” Journal of Business, 50 (04 1977), 198–207.CrossRefGoogle Scholar
Brown, P.; Keim, D. B.; Kleidon, A. W.; and Marsh, T. A.. “Stock Return Seasonalities and the Tax Loss Selling Hypothesis: Analysis of the Arguments and Australian Evidence.” Journal of Financial Economics, 12 (06 1983), 105–127.CrossRefGoogle Scholar
Brown, P.; Kleidon, A. W.; and Marsh, T. A.. “New Evidence on the Nature of Size Related Anomalies in Stock Prices.” Journal of Financial Economics, 12 (06 1983), 33–56.CrossRefGoogle Scholar
Chan, K. C., and Chen, N.. “An Unconditional Asset-Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk.” Journal of Finance, 43 (06 1988), 309–325.Google Scholar
Chan, K. C.; Chen, N.; and Hsieh, D. A.. “An Exploratory Investigation of the Firm Size Effect.” Journal of Financial Economics, 14 (09. 1985), 451–471.CrossRefGoogle Scholar
Christie, A. A., and Hertzel, M.. “Capital Asset Pricing Anomalies: Size and Other Correlations.” Unpubl. Manuscript, Univ. of Rochester (1981).Google Scholar
Fama, E. F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance, 25 (05 1970), 383–417.CrossRefGoogle Scholar
Fama, E. F., and French, K.. “The Cross Section of Expected Stock Returns.” Journal of Finance, 47 (06 1992), 427–465.Google Scholar
French, K. R. “Stock Returns and the Weekend Effect.” Journal of Financial Economics, 8 (03 1980), 44–70.CrossRefGoogle Scholar
Givoly, D., and Ovadia, A.. “Year-End Tax-Induced Sales and Stock Market Seasonality.” Journal of Finance, 38 (03 1983), 171–186.Google Scholar
Glosten, L. R., and Milgrom, P. R.. “Bid, Ask, and Transactions Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics, 14 (03 1985), 71–100.CrossRefGoogle Scholar
Handa, P.; Kothari, S. P.; and Wasley, C.. “The Relation between the Return Interval and Betas: Implications for the Size Effects.” Journal of Financial Economics, 23 (06 1989), 79–100.CrossRefGoogle Scholar
Haugen, R. A., and Lakonishok, J.. The Incredible January Effect. Homewood, IL: Dow Jones-Irwin (1988).Google Scholar
Hillion, P. H., and Sirri, E. R.. “The Seasonality of Market Risk.” Working Paper, Univ. of California, Los Angeles(1987).Google Scholar
Jarrow, R. “The Relation between Arbitrage and First Order Stochastic Dominance.” Journal of Finance, 41 (09. 1986), 915–921.CrossRefGoogle Scholar
Keim, D. B. “Size-related Anomalies and Stock Return Seasonality; Further Empirical Evidence.” Journal of Financial Economics, 12 (06 1983), 13–32.CrossRefGoogle Scholar
Keim, D. B. “Trading Patterns, Bid-Ask Spreads, and Estimated Security Returns: The Case of Common Stocks at Calendar Turning Points.” Journal of Financial Economics, 25 (11. 1989), 75–97.CrossRefGoogle Scholar
Lakonishok, J., and Smidt, S.. “Are Seasonal Anomalies Real? A Ninety-Year Perspective.” Review of Financial Studies, 1 (Winter 1988), 403–425.CrossRefGoogle Scholar
Lakonishok, J., and Smidt, S.. “Volume and Turn of the Year Behavior.” Journal of Financial Economics, 13 (09. 1984), 435–456.CrossRefGoogle Scholar
Levy, H. “Upper and Lower Bounds of Put and Call Option Value: Stochastic Dominance Approach.” Journal of Finance, 40 (09. 1985), 1197–1217.CrossRefGoogle Scholar
Neave, H. R., and Worthington, P. L.. Distribution-Free Tests. London: Unwin-Hyman (1988).Google Scholar
Petersen, M., and Fialkowski, D.. “Price Improvement: Stocks on Sale.” Working Paper, Univ. of Chicago (02. 1992).Google Scholar
Porter, R. B.; Wart, J. R.; and Ferguson, D. L.. “Efficient Algorithms for Conducting Stochastic Dominance Tests on Large Numbers of Portfolios.” Journal of Financial and Quantitative Analysis, 8 (01. 1973), 71–81.CrossRefGoogle Scholar
Reinganum, M. R. “Misspecification of Capital Asset Pricing: Empirical Anomalies Based on Earnings Yields and Market Values.” Journal of Financial Economics, 9 (03 1981), 19–46.CrossRefGoogle Scholar
Reinganum, M. R. “A Direct Test of Roll's Conjecture on the Firm Size Effect.” Journal of Finance, 37 (03 1982), 27–35.CrossRefGoogle Scholar
Reinganum, M. R. “The Anomalous Stock Market Behavior of Small Firms in January: Empirical Tests for Tax-Loss Selling Effects.” Journal of Financial Economics, 12 (06 1983), 89–104.CrossRefGoogle Scholar
Ritter, J. R. “The Buying and Selling Behavior of Individual Investors at the Turn of the Year.” Journal of Finance, 43 (07 1988), 701–717.CrossRefGoogle Scholar
Ritter, J. R., and Chopra, N.. “Portfolio Rebalancing and the Turn of the Year Effect.” Journal of Finance, 44 (03 1989), 149–166.Google Scholar
Roll, R. “Vas ist das? The Turn-of-the-Year Effect and the Return Premia of Small Firms.” Journal of Portfolio Management, 9 (Winter 1983), 18–28.CrossRefGoogle Scholar
Roll, R. “On Computing Mean Returns and the Small Firm Premium.” Journal of Financial Economics, 12 (06 1983), 371–386.CrossRefGoogle Scholar
Rozeff, M. S. “Tax Loss Selling: Evidence from December Stock Returns and Share Shifts.” In Proceedings of the Seminar on the Analysis of Security Prices. Center for Research in Security Prices (05 1986), 9–45.CrossRefGoogle Scholar
Rozeff, M. S., and Kinney, W. R.. “Capital Market Seasonality; The Case of Stock Returns.” Journal of Financial Economics, 3 (10. 1976), 379–402.CrossRefGoogle Scholar
Schultz, P. “Transactions Costs and the Small Firm Effect, A Comment.” Journal of Financial Economics, 12 (06 1983), 81–88.CrossRefGoogle Scholar
Schwert, G. W. “Size and Stock Returns, and Other Empirical Regularities.” Journal of Financial Economics, 12 (06 1983), 3–12.CrossRefGoogle Scholar
Seyhun, H. N. “The January Effect and Aggregate Insider Trading.” Journal of Finance, 43 (03 1988), 129–141.CrossRefGoogle Scholar
Stoll, H. R., and Whaley, R. E.. “Transactions Costs and the Small Firm Effect.” Journal of Financial Economics, 12 (06 1983), 57–79.CrossRefGoogle Scholar
Tinic, S. M., and Rogalski, R. J.. “The January Size Effect: Anomaly or Risk Mismeasurement.” Financial Analysts Journal, 42 (1986), 63–70.Google Scholar
Tinic, S. M., and West, R. R.. “Risk and Return, January vs. the Rest of the Year.” Journal of Financial Economics 13 (12. 1984), 561–574.CrossRefGoogle Scholar
Tinic, S. M., and West, R. R.. “Risk, Return, and Equilibrium: A Revisit.” Journal of Political Economy, 94 (02. 1986), 126–147.CrossRefGoogle Scholar
Whitmore, G. A., and Findlay, M. C.. “Stochastic Dominance.” Lexington, MA: Lexington Books (1978).Google Scholar
Williams, J. “Financial Anomalies under Rational Expectations: A Theory of the Annual Size and Related Effects.” Unpubl. Manuscript, New York Univ., Graduate School of Business (1986).Google Scholar