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

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