January Effect

armbruster

I'm doing an econometrics research project on the January effect.
My understanding is that at the turn of the year, a range of small cap stocks (and others) rise in price for an unknown reason - its an anomaly.
I do need to research the concept more, but can anyone take time out and advise me on how I would go about this?
I need to gather variables to explain an unexpected rise in the price of a stock - tax reasons, last quarters results, etc.
Can anyone give reasons as to why it occurs?
Also - I'm thinking of collecting data from the major exchanges and observing the January effect etc. But what variables should I come up with?
I'm a little confused.
Thank you.

freeze4real

Here's a link that might help.

http://stockcharts.com/school/doku.php?id=chart_school%3Atrading_strategies%3Athe_pre-holiday_effe

rugbyman

thats very interesting, other than the four examples in 2000, all the others are quite old.

are there any examples from the last ten years?

Thanks freeze4real
rugbyman

friendface

I was reading about this recently in "The Intelligent Investor" - Ben Graham

He does give reasons on why it did work in the past.

• Investors selling poorly-performing stocks late in the year to lock in losses and cut their tax bill
• Professional money managers growing more cautious at end of year seeking to preseve their performance figures - therefore they are more reluctant to buy (or hold) a falling stock
• If an underperforming stock is small and obscure, a money-manager will be less eager to show it in his year-end holdings

He does however go on to state that "these so-called investing approaches fell prey to Graham’s Law. All mechanical formulas for earning higher stock performance are “a kind of self-destructive process—akin to the law of diminishing returns.” There are two reasons the returns fade away. "

If the formula was just based on random statistical flukes (like The Foolish Four), the mere passage of time will expose that it made no sense in the first place. On the other hand, if the formula actually did work in the past (like the January effect), then by publicizing it, market pundits always erode—and usually eliminate—its ability to do so in the future.

You can download the first section of his book here. (Ref P41-42, 46)