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Abstract:
The January anomaly has attracted much academic interest and has been explained in different ways. However, the multitude of explanations has created confusion about the validity and relative importance of those explanations. In some cases, the hypotheses are examined individually though the evidence may be consistent with more than one hypothesis. Furthermore, prior work has not adequately controlled for the bid-ask bounce. Therefore, the results leave the reader somewhat confused regarding the January effect: is it caused by tax-loss selling, window-dressing, information, bid-ask bounce, or a combination of these causes? In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that past losers are more likely to be sold in December than in January to realize the tax advantage of capital losses. Past winners are more likely to be sold in January than in December to postpone payment of taxes. The selling is accompanied by changes in volume around turn of the year consistent with the tax-related selling hypotheses. The results are not materially affected when we use the midpoint of quotes instead of actual prices: the bid-ask bounce accounts for about 20-25% of the observed returns.
To verify the window-dressing hypothesis, we examine stock returns around June-July, the period of semi-annual reporting by institutional managers that is not contaminated by tax-related trading. We do not find an economically meaningful difference between the 5-day return at the end of June and the 5-day return at the beginning of July, which is not consistent with window dressing.
If the January effect occurs due to release of new information in January that affects the information-poor firms more than the information-rich firms then the returns in January should be related to availability of information (for example, with the number of analysts as a proxy). We do not find a correlation consistent with the information hypothesis. There is no information-related effect in June-July. The evidence here supports the tax-related selling hypotheses as the drivers of January effect.

January Effect, Seasonality, Window-Dressing, Tax Loss Selling, Tax Gain Selling

Abstract:
The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window-dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has been presented in support of a particular hypothesis though the same evidence may be consistent with more than one hypothesis.

Furthermore, prior work has not adequately controlled for the bid-ask bounce. In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other possible explanations.

Abstract:
We claim that speculative short sellers are partly responsible for the weekend effect. Concerned with their inability to trade over the weekend and in an attempt to reduce their risk exposure, short sellers close their speculative positions on Fridays and re-establish new short positions on Mondays, causing higher returns on Friday than on Monday. We find evidence consistent with this claim. Stocks with higher short interest exhibit greater weekend effect than stocks with lower short interest. Examination of the weekend effect for IPOs, short-interest stocks, and highly volatile stocks lend additional support for our hypothesis. Although it is difficult for investors to directly trade individual stocks to profit from the weekend effect, they can protect themselves against the weekend effect by not selling stocks on Mondays and not buying on Fridays.

short sales, Monday, Friday, seasonality, day-of-the-week, anomaly, mispricing, short selling, weekend effect

Abstract:
We claim that speculative short sellers are partly responsible for the weekend effect. Concerned with their inability to trade over the weekend and in an attempt to reduce their risk exposure, short sellers close their speculative positions on Fridays and re-establish new short positions on Mondays, causing higher returns on Friday than on Monday. We find evidence consistent with this claim. Stocks with higher short interest exhibit greater weekend effect than stocks with lower short interest. Examination of the weekend effect for IPOs, short-interest stocks, and highly volatile stocks lend additional support for our hypothesis. Although it is difficult for investors to directly trade individual stocks to profit from the weekend effect, they can protect themselves against the weekend effect by not selling stocks on Mondays and not buying on Fridays.

short sales, Monday, Friday, seasonality, day-of-the-week, anomaly, mispricing, short selling, weekend effect

Abstract:
Several studies have found that stock price changes resulting from firms added to the S&P 500 index can be best exp lained by a downward sloping demand curve. In this paper, we study price effects around both additions and deletions and find that the price effect of index changes is consistent with Merton's (1987) investor-awareness and market segmentation hypothesis. We find that the reduction in shadow cost of incomplete diversification that follows additions is correlated with abnormal returns accruing to the added stocks. We also find that the asymmetric price effects of additions and deletions that have not been explained by empirical studies thus far are consistent with market segmentation.

Abstract:
We study the price effects of firms added to and deleted from the S&P 500 index and document an asymmetric price response: there is a permanent increase in the price of added firms but no similar decline for deleted firms. These results are at odds with extant explanations of the effects of S&P 500 index changes which imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

index changes, S&P 500, index additions, index deletions, price pressure, investor awareness, downward sloping demand curves

Abstract:
In this paper, we argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close many of their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays.

We find evidence in support of this hypothesis: the weekend effect is significantly larger for high short-interest stocks than for low short-interest stocks. Further, we find that the likely substitution of speculative short sales by put options results in the weekend effect to diminish for stocks with actively traded options, but to continue for other stocks. An analysis of several special types of stocks, viz. IPOs, zero short-interest stocks, and highly volatile stocks, reveals support for the hypothesis.

Abstract:
We find that, due to arbitrage around index changes, investors in S&P 500-linked funds lose between 0.03% and 0.12% annually, while investors in Russell 2000-linked funds lose between 1.30% and 1.84%. In dollar terms, the losses range from $3.75 billion to $6 billion a year for the two indexes together.

These losses are an unexpected consequence of index fund investors evaluating index fund managers based on tracking error in an effort to control agency costs. Minimization of tracking error coupled with the predictability and/or pre-announcement of index changes creates the opportunity for a wealth transfer from index fund investors to arbitrageurs, particularly for Russell 2000-linked funds where the index changes are predictable. We propose solutions aimed at resolving the problem that can be implemented by indexing companies, index fund managers, or fund investors.

Index funds, Index changes, Agency costs

Abstract:
In this paper, we provide a first look at mutual funds that used short sales of US domestic stocks as an investment strategy. The shorted stocks tend to be glamour stocks with high accruals, indicating that mutual funds are sensitive to the information in valuation and earnings quality related indicators. We find that the shorted stocks significantly underperform subsequently. Using detailed portfolio holdings data, we show that the sample funds generate significant abnormal performance from both their short and long investments, which suggests that the act of short selling is an indicator of managerial skill. Mutual fund investors appear to be cognizant of this skill, and reward the funds that engage in short selling with abnormally large inflows of new money in the month when the fund first reports short positions and in the subsequent twelve months.

Mutual fund, Performance evaluation, Short sales

Abstract:
We present evidence on the December effect. When investors do not sell winner stocks in December but postpone their sale to January so that capital gains will not be realized in the current fiscal year, the "winners" appreciate in December. The December effect is relatively easy to arbitrage. We also present evidence regarding the persistence of the January effect and note that the January effect continues because it is difficult to exploit profitably.

Abstract:
We present evidence on the December effect. When investors do not sell winner stocks in December but postpone their sale to January so that capital gains will not be realized in the current fiscal year, the "winners" appreciate in December. The December effect is relatively easy to arbitrage. We also present evidence regarding the persistence of the January effect and note that the January effect continues because it is difficult to exploit profitably.

Abstract:
We find that, on average, firms added to the S&P 500 index experience a permanent price increase, while those deleted from it suffer only a temporary price decline. Existing theories, such as a downward sloping demand curve, liquidity, and information, fail to explain the asymmetric response. We propose a new explanation for the observed price patterns: changes in investor awareness. Investors become more aware of a stock upon its addition to the S&P 500 index but do not become similarly unaware of a stock following its deletion. This results in a significant price increase after an addition but not an equivalent decline after a deletion. Consistent with our hypothesis, we find that Merton's (1987) measure of awareness improves after an addition but remains essentially unchanged after a deletion. The price reaction is related to changes in the measure of awareness.

From a practical standpoint, our results suggest that index fund managers who are not constrained by tracking error minimization are better off not trading on the effective date. Rather, they may be able to benefit their shareholders by executing purchases of additions upon announcement, but waiting to sell deleted firms until well after the effective date.

Index changes, index funds, S&P 500 index, investor awareness, downward sloping demand curve

Abstract:
The multitude of explanations for the January effect leaves the reader confused about its primary cause(s): is it tax-loss selling, window dressing, information, bid-ask bounce, or a combination of these causes? The confusion arises, in part, because evidence has generally been presented in support of a particular hypothesis though the same evidence may be consistent with another hypothesis. Furthermore, prior work does not adequately control for the bid-ask bounce. In this paper, we try to disentangle different explanations of the January effect and identify its primary cause. We find that tax-related selling is the most important cause, overshadowing other explanations.

Abstract:
We study the price effects of firms added to and deleted from the S&P 500 index and document an asymmetric price response: there is a permanent increase in the price of added firms but no similar decline for deleted firms. These results are at odds with extant explanations of the effects of S&P 500 index changes which imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

index changes, S&P 500, index additions, index deletions, price pressure, investor awareness, downward sloping demand curves

Abstract:
We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: the inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks.

short sellers, short sales, weekend, options, seasonality