The January Effect: A Test of Market Efficiency

Document Type

Article

Publication Date

2-2014

Abstract

The purpose of this study is to test the weak form efficient market hypothesis by analyzing the effects of year end selling and the January effect on stock price. Specifically, is it possible to earn an above normal return at the beginning of the new year? Numerous past studies suggest that at year end investors sell underperforming stocks, thus negatively impacting stock price. Past studies also suggest repurchase of previous year losers in January. According to the weak form efficient market hypothesis, it is not possible to outperform the market – adjusted appropriately for risk – by using past information such as the sale of underperforming stocks at the end of the previous year. The market should adjust to this information sufficiently fast to disallow any investor’s earning an above normal risk adjusted return. Evidence here suggests that the market is weak form efficient with respect to year end selling. Results here support the strength of market efficiency. Specifically, for this study stock price begins rising before the last trading day of the year instead of decreasing.

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