January Effect In EU Stock Market
November 25, 2015
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In EU (2008-2014, monthly data) regarding the variation of stock returns “January effect” does not matter, while EU follows the USA stock returns and finally southern regions (who are mostly hit by the crisis) tend to have a negative impact on stock returns. The elaboration of panel data became feasible through the Eviews software package.
January Effect In EU Stock Market – Non-Technical Summary
Stock returns depend on many factors. Author will focus only on January effect, geographical region and interdependence between EU and USA stock returns. It has been pointed out that returns of common stocks in January are significantly larger than those in other months. This phenomenon is stronger for smaller firms and those with low share prices and who underperformed in the past (Rozeff and Kinney, 1976). There is an explanation for this phenomenon (Wachtel, 1942); (Ritter, 1988). This explanation is called “the tax-loss selling hypothesis”, according to which tax-loss selling investors sell the losing stocks of their portfolio at the end of the year in order to gain a benefit from tax. Afterwards, investors repurchase the stocks in the new year and thus they yield abnormal returns in January. This view is also shared by (Chen and Singal, 2004).
In southern EU company profitability is lower since these areas are mostly hit by the recent crisis (EIOPA, 2015); (Claessens et al., 2011). This (lower company profitability as an obstacle to economic growth) will tend to hinder stock prices to rise (a negative impact on stock prices) (Georgiou, 2009, 2010).
EU stock market prices follow USA stock market prices (Fehr et al., 2005). From the above mentioned it becomes necessary to measure after the starting of financial crisis the variation of EU stock returns not only under the January effect impact, but also taking into account geographical (regional) characteristics of the EU as well as considering the dependence of EU stock returns from the USA stock returns. This is the main concern of the author who pointed out that in EU (2008-2014, monthly data), regarding the variation of stock returns, January effect does not matter, while EU follows the USA stock returns and finally southern regions (who are mostly hit by the crisis) tend to have a negative impact on stock returns.
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