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INTRODUCTION
The January Effect or the abnormally large returns on common stocks during most of the Januarys compared to the entire year's returns has been one of the most intriguing issues in financial economics since 1976. Wachtel (1942) provides the first academic reference to a January effect in stock returns. 34 years later, Rozeff and Kinney (1976) pointed out that common stock returns in January are significantly larger than those in other months, and that the anomaly is related to small firms. In 1983, Keim, Roll, and Reinganum published their articles reaffirming that the January effect is more pronounced in small firms. On the other hand, Kohers and Kohli (1991) provide evidence that the January effect is not related to small firms, but their evidence was generally ignored.
Several explanations exist for the January effect. Stoll and Whaley (1983) attribute the anomaly to transaction costs. Chang and Pinegar (1989, 1990) and Kramer (1994) suggest seasonality in risk premium or expected returns. Ritter (1988) hypothesizes tax-loss selling effects. Haugen and Lakonishok (1988) suggest window dressing. Ogden (1990) relates the January effect to year-end transactions of cash or liquidity. Kohers and Kohli (1992) and Kramer (1994) connect the anomaly to business cycles, and Ligon (1997) reports that higher January returns relate to higher January volume and lower real interest rates.
The literature has not fully examined the changes in the January effect over the years. If the January effect exhibits an increasing or declining trend, or is disappearing in certain markets, then the trend may indicate some changes in the factors discussed above or changes in the impacts of these factors on the effect. And some unidentified factors or new factors may exist that cause the abnormal return in January.
In this study, the authors explore the trend of the January effect of two major stock indices in the United Kingdom - FT 30 and FT 700 - for the years 1976 through 2000. The two indices used are both value weighted, therefore the effect of large stocks on returns will be more apparent. The FT 30 index is an index of large firms, and the FT 700 index has smaller firms. Using the indices for the study avoids the issues related to portfolio formation, such as...