The Turn-of-The-Quarter Effect in Momentum and Reversal in U.S. Stocks: Price Pressure as the Result of Tax-Loss Sales and Window Dressing

65 Pages Posted: 17 Aug 2014 Last revised: 18 Nov 2017

See all articles by David P. Brown

David P. Brown

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Date Written: September 1, 2017

Abstract

Active managers have strong incentives to concurrently realize tax losses and window dress portfolios at the ends of calendar quarters. Consequently, stocks with capital losses experience downward price pressure, and a large share of returns to momentum strategies is earned at these times. This turn-of-the-quarter effect is absent prior to 1983, and is strong in big stocks afterward. Price pressure appears as: abnormal returns in factor model regressions, significant return responses in Fama-MacBeth cross-sectional regressions, and trends in cumulative abnormal daily returns. While price pressure in December creates return reversals in January, quarter-end price pressure continues into the following month.

Keywords: Momentum, Reversal, Window Dressing, Tax-loss Sale, Capital Losses, Price Pressure

JEL Classification: G12, G14

Suggested Citation

Brown, David P., The Turn-of-The-Quarter Effect in Momentum and Reversal in U.S. Stocks: Price Pressure as the Result of Tax-Loss Sales and Window Dressing (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=2481042 or http://dx.doi.org/10.2139/ssrn.2481042

David P. Brown (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-265-5281 (Phone)
608-265-4195 (Fax)

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