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Abstract:
A re-entry theory for abnormal behavior of financial markets in January is derived and tested. The model predicts that, by optimally shifting portfolios to mimic a benchmark, successful investment managers lock in superior performance, while unsuccessful investment managers lock out possible termination. Price pressure, ensuing from re-entry, occurs at the turn of the year, when managers uniformly prefer to reverse benchmark matching strategies. Analysis of professionally managed portfolios over the period 1969-1989 provides mixed support for the theory. At year-end, extreme performers exhibit some movement toward the S&P 500 index. This pattern reverses shortly after the turn of the year.
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