Question

Discuss (a) how January effect affects stocks; (b) its level of persistence; (c) how it can be arbitraged.

Discuss (a) how Friday effect affects stocks; (b) its level of persistence; (c) how it can be arbitraged.

Answer 1

A. The January effect is the seasonal tendency for the stocks to rise in that month. The January effect is a theory which says that every December stock prices take a dip and every January they recieve a boost. This is driven by heavy selling during December and aggressive buying during January. Investors tend to sell off low performing stocks at the end of each year.

It was observed that while this effect can still be appreciated in some markets it would appear that it is decreasing globally over time.

Beyond tax loss harvesting and repurchases, as well as investors putting cash bonus on the market another explanation for the January effect has to do with investor psychology. Some investors believe that January is the best month to begin an investment program or perhaps are following through on the new year plan.

B. Some theories that explain the effect point to the tendency of companies to release bad news on as Friday after the markets close. This helps in reducing the stock price when market reopens on Monday. Others state that the weekend effect might be linked to sort deleting which would affect socks with high short interest positions.

Many experts recommend seeking on Friday before that Monday so occurs, particularly if that Friday is the first day of the new month or when it precedes the 3 day weekend.