Testing for "January effect" in Canada finance industry

Abstract

This paper examines existence of January effect in the financial services industry in Canada. A regression model with dummy variables has been used to detect the January effect from 2003 to 2012. The January effect is a trend for stocks, particularly for small-cap firms. There are at least five reasons to explain why this market seasonality might occur, for instance, tax loss selling, the intergenerational transfer hypothesis, CAPM misspecification, seasonal information flows and window dressing. This paper found a weak January effect in small-cap firms before 2009, and this effect has declined in recent years with a more efficient capital market. While the January effect does not hold for each individual firm, this result cannot confirm the previous studies about the existence of January effect in Canada. Therefore, there are no abnormal returns for investors to take advantage of this January anomaly.