This study uses 90 years of daily data on the Dow Jones Industrial Average to testfor the existence of persistent seasonal patterns in the rates of return. Methodological issues regarding seasonality tests are considered. Wefind evidence of persistently anomalous returns around the turn of the week, around the turn of the month, around the turn of the year, and around holidays. In recent years there has been a proliferation of empirical studies documenting unexpected or anomalous regularities in security rates of return. In addition to the widely studied relation between firm size and rate of return,1 these include seasonal regularities related to the time of the day [Harris (1986)], the day of the week [see Ball and Bowers (1986), Cross (1973), French (1980), Gibbons and Hess (1981), Jaffe and Westerfield (1985), Keim and Stambaugh (1984), and Lakonishok and Levi (1982)], the time of the month [Ariel (1987)], and the turn of the year [see Haugen and Lakonishok (1988), Jones, Pearce, and Wilson (1987), Lakonishok This article has been presented at Cornell University,

We develop a dynamic model of market making incorporating inventory and information effects. The market maker is both a dealer and an investor, quoting prices that induce mean reversion in inventory toward targets determined by portfolio considerations. We test the model with inventory data from a New York Stock Exchange specialist. Specialist inventories exhibit slow mean reversion, with a half‐life of over 49 days, suggesting weak inventory effects. However, after controlling for shifts in desired inventories, the half‐life falls to 7.3 days. Further, quote revisions are negatively related to specialist trades and are positively related to the information conveyed by order imbalances.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 128.235.251.160 on TueABSTRACT Capital gains taxes create incentives to trade. Our major finding is that turnover is higher for winners (stocks, the prices of which have increased) than for losers, which is not consistent with the tax prediction. However, the turnover in December and January is evidence of tax-motivated trading; there is a relatively high turnover for losers in December and for winners in January. We conclude that taxes influence turnover, but other motives for trading are more important. We were unable to find evidence that changing the length of the holding period required to qualify for long-term capital gains treatment affected turnover.INVESTORS RESPONDING TO THE tax incentives in the capital gains laws should produce predictable patterns in the volume of trading in a stock, but not necessarily in its price. This study uses past price patterns as a proxy to measure the incentives to sell or avoid selling a stock and observes trading volumes to estimate the extent to which investors respond to these incentives. Past price patterns may influence trading volumes for other (non-tax related) reasons as well. These are also considered.We find that past prices influence current incentives to trade through both tax and non-tax motives. Winners tend to have higher abnormal volumes than losers. This would be expected if non-tax-related motives were predominant. However, the influence of tax-related motives on trading volume is shown by seasonal variations in the relationship between past price changes and turnover. As predicted by tax-induced trading theories, the volume of losers is higher than normal in December, and the volume of winners is higher than normal in January. We found no evidence that trading volume was affected by changes in the length of the holding period required to qualify for long-term capital gains.Investors' reactions to capital gains taxes are important for several reasons. First, a comprehensive understanding of investor behavior would include both price and volume. Understanding the relationship between taxes and volume is a fruitful and convenient method of contributing to this subject. The resource allocation consequences of capital gains taxes are controversial in part because * Lakonishok is from the Faculty of Management, Tel Aviv University and the Johnson Graduate School of Management, Cornell University. Smidt is from the Johnson Graduate School of Management, Cornell University. The authors are grateful to Avraham Beja, George Constantinides, Paul Halpern, and Jim Poterba for their helpful comments and to Ofer Komai for his programming assistance. The paper was presented at Cornell University, Tel Aviv Uni...

We develop a dynamic model of market making incorporating inventory and information effects. The market maker is both a dealer and an investor, quoting prices that induce mean reversion in inventory toward targets determined by portfolio considerations. We test the model with inventory data from a New York Stock Exchange specialist. Specialist inventories exhibit slow mean reversion, with a half‐life of over 49 days, suggesting weak inventory effects. However, after controlling for shifts in desired inventories, the half‐life falls to 7.3 days. Further, quote revisions are negatively related to specialist trades and are positively related to the information conveyed by order imbalances.

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