An Empirical Study on January Anomaly and Return Predictability in an Emerging Market: Evidence from India

Abstract

This paper examines whether the 'January anomaly' or 'seasonality of monthly returns' found in several advanced markets is also found in the fast developing Indian markets. Any anomaly, which includes January anomaly or effect, would enable the investors and speculators to gain abnormal returns. Although the presence of January anomaly defeats the basic premises of the efficient market hypothesis, it has greater implications to design suitable investment strategies in the long run. We use the logarithmic data of the five most important indices of the National Stock Exchange of India (NSE) for the period from 1999 to 2007 and apply a set of selected statistical parameters to examine the presence of anomaly, if any, in the market. Our analytical results indicate the presence of 'January anomaly' in SP Contrary to this, November and December show significant positive high returns goading us to conclude that these two months are the best period to sell the securities (sell high). Tax-loss selling hypothesis and Accounting-information hypothesis could be the possible explanations for the anomalous behavior of the scrips in the Indian markets. In a nutshell, our results indicate that the Indian markets show evidences of seasonal anomalies and offer enormous opportunities to gain reasonable returns in the long-run.