Does Tax-Loss Selling Affect UK Momentum Trading?
Posted: 5 Jan 2009
Date Written: January 4, 2009
According to the tax-loss selling hypothesis investors sell bad performing stocks at tax-year-end so as to realize losses and hold on to winners so as not to realize taxable gains. An implication of this is that ceteris paribus there should be a contemporaneous increase (and possible later reversal) on the returns of a momentum strategy that is long in winners and short in losers. This paper examines whether this is the case for the London Stock Exchange. Results show that year-end tax-loss selling by individual investors can affect momentum returns, while institutional investors have a smaller impact that can also be attributed to window dressing.
Keywords: Momentum, Seasonality, Tax-Loss Selling, Window Dressing London Stock Exchange
JEL Classification: G1
Suggested Citation: Suggested Citation