Professional portfolio managers and the January effect: theory and evidence

George Athanassakos and Jacques A. Schnabel

Review of Financial Economics, 1994, vol. 4, issue 1, 79-91

Abstract: While many researchers have documented a pronounced seasonality of stock returns in the month of January, a universally accepted theory of why this so‐called “January effect” occurs has yet to be put forward. This paper develops a theory of portfolio rebalancing which is based on the effects induced by the calendar year planning horizon of professional portfolio managers. A simple model of portfolio choice and leisure consumption is developed via which it is shown that portfolio allocations early in the calendar year should be more heavily weighted towards the stock market and less heavily weighted towards cash and cash equivalents than later in the calendar year. The paper provides evidence on the impact systematic shifts in the portfolio holdings of institutional investors have had on the aggregate stock market in Canada over the period 1973:Q1 to 1992:Q4. It is shown that institutional trading actively influences stock price changes and that portfolio rebalancing on the part of professional fund managers, prompted by conflict‐of‐interest considerations, causes the bidding up of stock prices in January.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:4:y:1994:i:1:p:79-91

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