Tax-Loss Selling and the January Effect: Evidence from Municipal Bond Closed-End Funds

40 Pages Posted: 22 Jun 2004

See all articles by Laura T. Starks

Laura T. Starks

University of Texas at Austin - Department of Finance

Li Yong

The University of Texas at Arlington

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Date Written: March 2004

Abstract

This paper provides direct evidence in support of the tax-loss-selling hypothesis as an explanation for the January effect. Specifically, we examine the turn-of-the-year return and volume patterns of an asset class held almost entirely by tax-sensitive individual investors: municipal bond closed-end funds. First, we document a January effect for the municipal bond closed-end funds. Next, we provide direct evidence that the observed January effect can be largely explained by the tax-loss-selling activities at the end of the previous year. Moreover, we find that funds associated with brokerage firms, which should be providing investors with tax advice, display more tax-loss-selling behavior.

Keywords: January effect, tax-loss-selling

Suggested Citation

Starks, Laura T. and Yong, Li and Zheng, Lu, Tax-Loss Selling and the January Effect: Evidence from Municipal Bond Closed-End Funds (March 2004). AFA 2005 Philadelphia Meetings. Available at SSRN: https://ssrn.com/abstract=476622 or http://dx.doi.org/10.2139/ssrn.476622

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

Li Yong (Contact Author)

The University of Texas at Arlington ( email )

Box 19449 UTA
Arlington, TX 76019
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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