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Information Uncertainty Risk and Seasonality in International Stock Markets


  • Acknowledgements: This research was supported by the Korea Research Foundation Grant funded by the Korea Government (MOEHRD) (KRF-2006-321-B00477).

Corresponding author: Dongcheol Kim, Korea University Business School, Anam-dong Sungbuk-Gu, Seoul 136-701, Korea. Tel: +82-2-3290-2606, Fax: +82-2-922-7220, email:

JEL Classification:,


A parsimonious two-factor model containing the market risk factor and a risk factor related to earnings information uncertainty has been developed to explain the seasonal regularity of January in international stock markets. This two-factor model shows apparently stronger power in explaining time-series behavior of stock returns and the cross-section of average stock returns in all major developed countries than do the competing models. Furthermore, the arbitrage residual return in January, which is the difference in the average residual returns between the smallest and largest size portfolios, is statistically insignificant in all the countries. These results indicate that the risk factor related to earnings information uncertainty plays a special role in explaining the seasonal pattern of stock returns in January, and that January might be a month that potentially tends to differentially reward stocks having uncertain earnings information. It could be argued, therefore, that large returns in January might be a risk premium for taking information uncertainty risk concerning earnings and unexpected earnings surprises faced at the earnings announcement, and that the previously reported strong January seasonality in stock returns might result from the use of misspecified models in adjusting for risk.