Has the November Effect Replaced the January Effect in Stock Markets?

Abstract

Results of previous studies support the November effect of the 1986 Tax Reform Act (TRA) on certain stock portfolios. The rapid growth of mutual funds driven by the fundamental changes in the retirement benefit system in past decades may expand the seasonality from portfolios to stock markets and lead to a replacement of the January effect with the November effect in stock markets. Results of this study support the January effect in the large-cap and small-cap stock markets in the pre-TRA period, although the January effect may share a large portion of co-variation with the size effect. However, the November effect is independent of the size effect. Furthermore, a major shifting process of the January effect to the November effect occurs in both the large-cap and small-cap stock markets. The significant result of the November effect in the post-TRA period questions the claim that fund managers are capable in mitigating potential price pressures. Copyright © 2011 John Wiley & Sons, Ltd.