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ALL THINGS CONSIDERED, TAXES DRIVE THE JANUARY EFFECT

Authors

  • Honghui Chen,

  • Vijay Singal


  • The authors thank Greg Kadlec; Raman Kumar; Dilip Shome; and especially William T. Moore, the editor; and an anonymous referee for comments. Vijay Singal acknowledges partial financial support from a Virginia Tech summer grant.

Abstract

The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has generally been presented in support of a particular hypothesis though the same evidence may be consistent with another hypothesis. Furthermore, prior work does not adequately control for the bid-ask bounce. In this article we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other explanations.

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