Alternatively the stock alpha estimated by the sim

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Unformatted text preview: ess return of small firms – average excess returns of large firms is the highest Difference in excess returns is more noticeable in the first 5 trading days of January Effect lasts for the first 2 weeks of January The Small firm in January effect suggests that on the last trading day of December, investors can simply use another piece of readily available information (size of a firm) to form portfolios earning unusually large excess returns within the first 2 weeks of January. However, this effect can be argued by the tax-loss selling argument, in which companies sell stocks that performed poorly at year end to incur capital losses for offsetting the capital gains in other stocks made during the year, and then purchase the declined stocks again in January. This increase the demand for such stocks in January, hence increases the price of the stocks. However, the tax-loss selling argument can also be contradicted, as the size is not controlled. This means that by comparing stocks that had declined most during the year, there will be little difference in daily average returns in January between large and small firms, and similar in the case of stocks which had declined least in the year. Reinganum (1983) conducted a thorough study on this tax-loss selling argument. After sorting the sample of firms into 10 deciles according to size, firms were further classified into 4 groups according to the extent of price decline during the year. The results: Group of smallest firms that declined the most during the year experienced larger daily average returns in January than the group of smallest firms that declined the least during the year – supporting tax-loss selling argument. Group of largest firms that declined the most during the year did not experience larger daily average returns in January than the group of largest firms that declined the least during the year – contradicting tax-loss selling argument. Large difference in daily average returns in January between: o Two groups of smallest and largest firms that declined the most during the year o Two groups of smallest and largest firms that declined the least during the year o Confirming the size effect Hence he found only weak evidence to support the tax-loss selling effect and provided evidence of the January anomaly. T ESTING THE MARKET FOR STRONG FORM EFFICIENCY When someone has insider information, there is no doubt that prior to the public release of such information, insiders can use it to earn a...
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This document was uploaded on 03/21/2014.

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