Risk and the January effect

Qian Sun, Hin Sang Tong

Research output: Journal article publicationJournal articleAcademic researchpeer-review

30 Citations (Scopus)

Abstract

We use a time-series GARCH framework with the conditional variance/covariance as proxies for systematic risk to reexamine the proposition by Rozeff and Kinney (1976) and Rogalski and Tinic (1986) that the January effect may be a phenomenon of risk compensation in the month. We find no clear evidence that either conditional volatility or unconditional volatility in January is predominantly higher across the sampling years. Hence, against the proposition, the January effect is not due to risk per se. Rather, we find strong evidence that the January effect is due to higher compensation for risk in the month. This may be possible if investors have an increasing RRA utility function. Although many studies find that volatility tends to be higher in January, we find it to be period-specific and mostly in value-weighted return series, but not in equal-weighted return series. This is true both for the unconditional and conditional return volatility.
Original languageEnglish
Pages (from-to)965-974
Number of pages10
JournalJournal of Banking and Finance
Volume34
Issue number5
DOIs
Publication statusPublished - 1 May 2010

Keywords

  • GARCH
  • January effect
  • Risk premium
  • Seasonality
  • Volatility

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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