Portfolio Rebalancing and the Turn-of-the-Year Effect

Authors

  • JAY R. RITTER,

  • NAVIN CHOPRA

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    • Both authors from the School of Business Administration, University of Michigan. We would like to thank Cliff Ball, Robert S. Hansen, Robert Haugen (the referee), Greg Niehaus, Krishna Ramaswamy, Nejat Seyhun, René Stulz (the editor), and participants in workshops at the University of Michigan, the University of Pittsburgh, and the University of Wisconsin for useful comments. An earlier version of this paper was circulated under the title of “Risk, Return, and January.” This research is partially supported by a Michigan Business School summer research grant.


ABSTRACT

This paper finds that, for the 1935–1986 period, the market's risk-return relation does not have a January seasonal. The findings differ from those of other studies due to the use of value-weighted, rather than equally weighted, portfolios. Inferences are sensitive to the weighting procedure because of the small-firm return patterns in January. In particular, even in those Januaries for which the market return is negative, small-firm returns are positive, and they are more positive the higher is beta. This is consistent with the portfolio rebalancing explanation of the turn-of-the-year effect.

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