Tax-loss Selling Research Articles

Shared analyst coverage, 52-week high, and cross-firm return predictability

In this study, we show that the return predictability of analyst-connected firms is positively correlated with nearness to 52-week high stock prices. Our results are robust to tax loss selling and penny stocks and when controlling for market factors and macroeconomic conditions. The impact of the 52-week high on the analyst-connected momentum effect is stronger among focal stocks of smaller firms, those with lower institutional ownership, and those with less analyst coverage. Moreover, the greater the number of shared analysts, the stronger the relationship between firm fundamentals, resulting in stronger return predictability. When both focal and analyst-connected firms have stock prices near (far from) their 52-week highs, there is a stronger underreaction to good (bad) news about analyst-connected firms.

Seasonality, Monetary Supply and Taiwanese Momentum

Abstract For the Taiwanese stock market, evidence from the present study documents significant reversal in January-February, but strong momentum in March-December when there are increases of lagged M1B. Moreover, the M1B-induced momentum manifests only over economic expansion, rather than economic recession. Both the reversal and the momentum can be partly explained by unrealized capital gains, implying the disposition effect to some extent driving both phenomena since Grinblatt and Han (2005) used unrealized capital gains as a proxy for the disposition effect. We further find the reversal primarily occurring in January, implying reverse disposition trading occurring before the beginning of a year. As there are no capital gain taxes levied in Taiwan, the reverse disposition trading cannot be related to tax-loss selling as in U.S. Furthermore, time-varying market risk exposure cannot explain the reversal in most cases. For the March-December momentum, apart from unrealized capital gains, the CAPM and the Fama-French 3-factor models can each to some extent explain the momentum. JEL classification numbers: G10, G11, G19. Keywords: Price momentum; Reversal; Disposition effect; Emerging stock market.

THE IMPACT OF SEASONAL AFFECTIVE DISORDER ON GREEN CRYPTOCURRENCIES

Purpose- Seasonal Affective Disorder (SAD) which arises during the winter when there are fewer daylight hours is a form of the major depressive disease. SAD affects most of the financial markets. Since there is scarce research on the relationship between SAD and cryptocurrency returns, this study is aimed to examine the impact of SAD on green cryptocurrencies. To the best of the author’s knowledge, this is the first study that investigates the relationship between SAD and the returns of green cryptocurrencies, so the study is expected to fill the gap in the related literature. Methodology- Cardano (ADA), Tron (TRX), and Stellar (XLM) are considered for the analysis, which covers the period spanning from January 2018 to March 2023. The multiple regression model has been implemented by including dummies for autumn, Mondays, and tax-loss selling. A specific location must be specified for the latitude information to determine how many hours are spent at night. The latitude of New York City is considered for that calculation because the majority of cryptocurrency users are concentrated in the USA. Findings- The findings demonstrate that the SAD, autumn, Monday, and tax-loss selling effects have no impact on green cryptocurrencies. Due to the worldwide spread of cryptocurrency investors, these effects are probably mitigated. Conclusion- According to the results, arbitrageurs are unable to benefit from generating abnormal returns using seasonal return patterns. Future studies might use non-linear techniques, change the location that is considered when calculating latitude, and include more cryptocurrencies in their examinations. Keywords: Seasonal affective disorder, cryptocurrencies, green finance, behavioral finance, anomalies. JEL Codes: G10, G40, G41

The January Anomaly and Anomalies in January

Prior research finds that stocks earn significantly higher returns in January compared to other months, with the effect most often attributed to tax-motivated selloffs in December leading to price reversion in January. We examine how patterns in turn-of-the-year performance impact prominent return anomalies. We find that short-term reversals strengthen while momentum changes sign at the turn of the year, and such patterns are more pronounced following years of recession and poor market performance, consistent with tax-loss selling playing a key role. Although additional factors are likely to contribute to the overall effect, no significant change in anomaly performance occurs midyear, casting doubt on window-dressing as a primary driving force.

Will stock rise on Valentine’s Day?

PurposeThis study is a pioneer in the academic literature to investigate the relationship between Valentine’s Day and stock market returns of major economies around the world.Design/methodology/approachSpecific control variables for Valentine's Day are introduced to eliminate the potential influence of other effects.FindingsThe findings indicate that stock returns are higher on the days when Valentine's Day is approaching than on other days for most cases, showing “the Valentine Effect” in the stock market.Originality/valueUnlike other holiday effects in the previous literature, the Valentine's Day effect cannot be explained by many conventional theories, such as tax-loss selling and the inventory adjustment hypothesis.

The clientele effect around the turn of the year: evidence from the bond markets

Studying the returns of US Treasury, corporate, and municipal (muni) bonds at the index level over 2004-2020, I find a strong turn-of-the-year effect – low December returns and high January returns – in the high-yield muni index. The investment-grade muni index exhibits a similar but weaker effect. High-yield munis is the only class whose December returns are negatively correlated with year-to-date yield changes. Dominance of highly tax-sensitive households who engage in tax-loss selling, combined with opaqueness, low liquidity, and a small role of ETFs in munis make it difficult to arbitrage away the December price decreases. The investment-grade and high-yield corporate bond indices have abnormally high December returns in years with capital losses. The high-yield corporate index also has abnormally high December returns even in years without capital losses. It represents a change from the findings of prior research and suggests that corporate bond investors exhibit contrarian tendencies in December.

Tax-loss selling and the January effect revisited: Evidence from municipal bond closed-end funds and exchange-traded funds

Tax-loss selling and the January effect revisited: Evidence from municipal bond closed-end funds and exchange-traded funds

Window dressing in equity mutual funds

This study examines the relationships among window dressing (WD), portfolio concentration, fund flows, and fund performance in Taiwan’s equity fund industry. Our empirical analysis documents that the WD phenomenon exists in equity mutual funds with poorly performing fund managers who are more likely to conduct WD activities. Funds with concentrated investment in their top 10 shareholdings are more likely to do this, and there is also a stronger year-end WD effect, showing that fund managers are more prone to improve the appearance of their portfolios at that time versus at other quarter-ends. Funds with higher WD activities tend to have poor performance during the quarter, but have a larger (smaller) proportion of winner (loser) stocks at the end of the quarter. In addition, fund managers typically buy winners at higher prices and sell losers at lower prices near quarter-ends. The highest WD quintile funds encounter lower long-term fund flows, and funds with higher WD activities experience poorer long-term performance. Finally, fund managers’ portfolio rebalancing more closely correlates to the agency problem than to momentum trading or tax-loss selling.

ANALYSIS OF JANUARY EFFECT ON BIG STOCK COMPANIES AND SMALL STOCK COMPANIES AT INDONESIA STOCK EXCHANGE

January Effect is one of market anomaly where the stock returns in January are higher than other months. Some of causes the January Effect are the actions of investor who carry out tax-loss selling and windows dressing. In addition, investors have different views to choose stocks, based on market capitalization dan risk. This study is purposed to find the January Effect in the Indonesia Stock Exchange and January Effect on small company stock is stronger than large company stock. The data is normally distributed using the One-Sample Kolmogorov-Smirnov test. The test using the OLS method with dummy variable at five percent significance level. By using a sample of 30 large company stocks and 30 small company stocks based on market capitalization during period 2013-2017, the result of this study found a January Effect in the Indonesia Stock Exchange. But the January Effect doesn’t occur on small company stock, except on large company stock during that periode.

Unique Calendar Effects in the Indian Stock Market: Evidence and Explanations

Covering 20 years (1995–2015), the article ascertains the presence of the month-of-the-year effect in the Indian stock market, for the raw returns series as well as after adjusting for non-linearities of the market. Whether the effect is the same for portfolios of different sizes and values is also ascertained. The threshold generalised autoregressive conditionally heteroskedastic (TGARCH) model is employed to address non-linearity. The results suggest the presence of higher returns in November/December at the index level. Further, only firms with a size smaller than the average exhibit seasonality in the form of the April/May and November/December effect. The value-sorted portfolios exhibit weaker evidence of the December effect. Tax-loss selling, window dressing and behavioural aspects seem to provide the explanation. JEL Classification: C58, G14

A study of prominence for disposition effect: a systematic review

Purpose The purpose of this paper is to study the disposition effect that is exhibited by the investors through the review of research articles in the area of behavioral finance. When the investors are hesitant to realize the losses and quick to realize the gains, this phenomenon is known as the disposition effect. This paper explains various theories, which have been evolved over the years that has explained the phenomenon of disposition effect. It includes the behavior of individual investors, institutional investors and mutual fund managers. Design/methodology/approach The authors have used the existing literatures from the various authors, who have studied the disposition effect in either real market or the experimental market. This paper includes literature over a period of 40 years, that is, Dyl, 1977, in the form of tax loss selling, to the most recent paper, Surya et al. (2017). Some authors have used the PGR-PLR ratio for calculating the disposition effect in their study. However, some authors have used t-test, ANNOVA, Correlation coefficient, Standard deviation, Regression, etc., as a tool to find the presence of disposition effect. Findings The effect of disposition can be changed for different types of individual investors, institutional investors and mutual funds. The individual investors are largely prone to the disposition effect and the demographic variables like age, gender, experience, investor sophistication also impact the occurrence of the disposition effect. On the other side, the institutional investors and mutual funds managers may or may not be affected by the disposition effect. Practical implications The skilled understanding of the disposition effect will help the investors, financial institutions and policy-makers to reduce the adverse effect of this bias in the stock market. This paper contributes a detailed explanation of disposition effect and its impacts on the investors. The study of disposition effect has been found to be insufficient in the context of Indian capital market. Social implications The investors and society at large can gains insights about causes and influences of disposition effect which will be helpful to create sound investment decisions. Originality/value This paper has complied the 11 causes for the occurrence of disposition effect that are found by the different authors. The paper also highlights the impact of the disposition effect in the decision-making of various investors.

Day of the week effect and Baltic stock exchanges

Objective: There is an ongoing debate in the field of finance and economics on the existence of abnormal equity returns associated with calendar events. Commentaries including tax-loss selling at year-end, cash flows at month-end and negative news flow over the weekend give convincing evidence in support of returns abnormalities. In the mainstream markets (sector and geography wise) the topic of calendar anomalies was heatedly debated by industry participants and academics. Baltic bourses, however, received less attention. Given the gap, this current research was set to examine daily variations in the performance of the NASDAQ Baltic series. Research Design & Methods: A well-established parametric algorithm was employed to test whether variations in returns are statistically different throughout week. Dummy-variable regression with an additional set of dummies that controlled for outliers in the series was performed. Findings: The study found no evidence in support of the day-of-the-week in four NASDAQ Baltic series. However, Thursday and Friday came out as being positive and significant in Vilnius and Riga series. Contribution & Value Added: The paper adds additional evidence on the contested issue of calendar anomalies. Certainly, differentials achieved on Thursday or Friday would not generate abnormal returns for institutional or individual investor. However, investors could use this updated knowledge to trade more effectively.

Improving Long-Term Portfolio Risk and Return by Using Appreciated Stocks for Charitable Donations

Stock investors who are charitable donors can minimize capital gains taxes and improve portfolio diversification by donating their most appreciated shares instead of cash, and then investing the freed-up cash in the portfolio’s least-weighted stocks. The charity is indifferent to the donation method, and the investor receives the same charitable deduction. Monte Carlo simulations show that a donor-investor using this method enjoys substantially higher wealth and lower portfolio risk, particularly over longer time horizons. This strategy can be integrated with tax loss selling and some limited gain harvesting to further increase after-tax returns and reduce risk.

Testing the Tax-Loss Selling Explanation of the January Effect: Evidence from a 'Confiscatory' Tax Implemented in France in 1921

For almost a century, we document a significant January effect on the French equity market. We find strong evidences in favor of the tax-loss selling explanation for this phenomenon. Indeed, the January effect was insignificant before the introduction of a “confiscatory tax” on capital gains in 1921, and became strongly significant afterward. Moreover, the rate of taxation is statistically significant to explain the strength of the January effect over time. Studying individual stock returns, a DiffInDiff investigation shows that past losers, outperform past winners at the turn of the year but only after 1921, which reinforces further the tax-loss selling explanation of the January effect.

Trends and Calendar effects in Malaysia’s Stock Market

Investing can help a person's wealth to generate more, and investing in stock is proven as one of the most profitable forms of available investment. The benefits gained in stock broking are immediate Buy/Sell which investor can sell part of their investment any time and at low transaction cost. However, investing in stock will require investor to observe the market, as market can be a volatile place and investor need to acquire knowledge of what they actually are doing. This study will discuss the price trends over the year, and how it will get affected by the seasonality in Malaysia, which also known as the calendar effects. The factor to be investigated in this study is the price on holiday’s season, the January effect or any other monthly seasonality. The daily price of KPJ Healthcare Berhad for the year 2011 is the sample was chosen in this study. Further this study, data used is derived from the weak-form efficient markets hypothesis, which is the price history and case study. Regression method is used in this study in order to help achieving the findings. This should be a continuous study, and adding on more other factors, such as wars and economic crises, and traders, investors and other speculators. This paper has proved the existence of calendar anomalies in KPJ's stock price for Chinese New Effect, Aidilfitri Effect and Christmas Effect. However, the price changes are believed more likely due to the investors tormenting about central banks raising interest rates to restrain rising inflation. Other than that, for Aidilfitri Effect and Christmas Effect, further study should be perform since the raise of the stock market, may be due to the world’s stock market begin to be stronger after the European sovereign debt crisis to Spain and Italy in August. Conversely, there are positive returns for January. However, the findings are non-related to the January effect. This is because January effect arises due to tax-loss selling, which Malaysia has a different tax system compared to other countries. Shareholders in Malaysia are not necessary to pay any taxes on the return they gained from share trading.

Seasonality Effects through ARCH and GARCH Model: Evidence from Shanghai Stock Market (China)

The paper examines three seasonal effects from Shanghai Stock market China: the weekend effect, turn of the month and holiday effect. The evidences of weekend effect observed on Friday along with seasonality effect on alternate days of the week. In terms of monthly effect, we have found February anomaly in place of January which contradicts the theory of Tax-Loss selling hypothesis. Moreover, last quarter of the year showing positive healthy returns. However, the study could not find any trend of returns on holiday effects. The ARCH and GARCH model of all three seasonality effects showing significant results. Based on overall outcomes, the Shanghai Stock market is considered as inefficient weak form of market efficiency.

Do Financial Advisors Provide Tangible Benefits for Investors? Evidence from Tax-Motivated Mutual Fund Flows*

Rationality would suggest that advice-seeking investors receive benefits from costly financial advice. However, evidence documenting these benefits for US investors has so far been lacking. This article is the first to document that US mutual fund investors indeed receive one of the many previously hypothesized benefits associated with financial advice. The documented benefit comes from valuable tax-management advice that helps investors avoid taxable fund distributions and becomes even more valuable when investors face distributions that can cause large and hard-to-predict tax liabilities. Additional evidence suggests that financial advice helps with other aspects of tax management such as tax-loss selling.

Tax-Efficient Trading of Municipal Bonds

The author proposes a dynamic strategy to optimize the after-tax performance of a municipal bond portfolio. This study extends previous work on one-time tax-loss selling. He considers a potential tax-driven trading opportunity as an option with quantifiable value, acquired automatically and without cost in a taxable account. Within this formulation, selling a bond and reinvesting in another also entails the swap of the associated tax options. When considering the value of the tax option acquired upon reinvestment, the time to optimum execution is drastically reduced in comparison to one-time selling. The author assumes that the choice of reinvestment bonds maintains the same interest rate exposure as that from before the sale.

The January seasonality and the performance of country-level value and momentum strategies

The study examines the turn-of-the-year effect in the country-level value and momentum strategies. We re-examine eight distinct value and momentum strategies within 78 markets in the 1995‑2015 period and we test their performance for the seasonal patterns. We find that during the last 20 years the value strategies performed particularly well in January and poor in December. On the contrary, the momentum strategies had high returns in December and low in January. These observations are consistent with the explanations of the January seasonality related to the tax loss selling and window dressing effects.

The disposition effect in the absence of taxes

I measure household investment decisions undertaken in a setting that is free from investment taxes. The disposition effect is unequivocally present, but any seasonal impact of tax-loss selling is absent. There is evidence that the disposition effect correlates positively with inferior risk-adjusted investment performance. Although household preferences are unknown, losses cannot be explained by tax benefits.