Discussion of Microstructure and Seasonality in the UK Equity Market

Abstract

Since the pioneering works of Fama (1965) and Cross (1973) there have been many anomalies documented concerning the behaviour of security price returns: one of the most prevalent of these being the`January' or`turn-of-year' effect, where returns are much higher during the month of January than in any other month. Lakonishok and Smidt (1988) note that this anomaly has existed for over half a century and has led some financial economists to question the notion of market efficiency and in particular asset pricing models. Lakonishok and Smidt (1988) further suggest that scepticism concerning security price regularities or seasonalities are likely to persist until confirmatory evidence is provided from different data sets over different periods of time. As Mills and Coutts (1995) document, although a wide body of evidence exists for the US markets, relatively little empirical research has been undertaken on regularities using UK data. 1 This is clearly a major shortcoming in the`anomalies' literature, for as Bowers and Dimson (1988) suggest, international comparisons enable researchers to investigate whether factors that are supposedly important in the US, for example, are also important in other countries. 2 Such comparisons are particularly useful because security price regularities and their causes could be specific to individual market micro-structures and economies, and thus an assessment of their persistence across markets is very useful. 3 It is in this context that Draper and Paudyal (1997) present the results of their investigation of the impact of alternative company year-ends on returns, as well as seasonality in bid-ask spreads and trading activity variables, including volume, number and size of trades. Consequently, this makes their study somewhat unique, for as they correctly state:Studies of the UK market are limited and have concentrated on the analysis of stock returns. This paper explores the impact of seasonality on variables including returns within the very different UK tax and equity trading systems. This study varies from existing UK studies in several respects. The current system of market making introduced in October 1986 differs significantly from the previous system. Studies based on experience prior to 1986 do not represent the current system whilst studies

Is Beta Dead or Alive?

“…2 In the UK tax system, for individual investors, the tax year-end is April 5th, while for institutional investors, the tax year-end is primarily at the end of December. Draper and Paudyal (1997) and Coutts (1997) document the evidence from the UK stock markets that January and April have high returns, which are consistent with the tax-loss-selling hypothesis. However, the December return is also high, a result that is inconsistent with the taxloss-selling hypothesis.…”

“…Then, it was contradicted by the findings of Ritter and Chopra (1989) when they show high January returns exist for stocks not only incurring losses but also experiencing gains in the previous year. The tax-loss-selling hypothesis is also weakened by the findings of Gultekin and Gultekin (1983) and Corhay, Hawawini and Michel (1987), Coutts (1997) and Draper and Paudyal (1997) who show high January returns also exist in countries where fiscal year-ends are different from the calendar year-ends. 2 Moreover, the tax-lossselling hypothesis cannot explain the evidence from the US provided by Lakonishok and Smidt (1989) who show high January returns existed before the introduction of the US income tax system.…”

“…Numerous theories have been hypothesized to explain the turn-of-the-year effect such as the popular tax-loss-selling, portfolio re-balancing, high-risk, and over-reaction hypotheses. The tax-loss-selling hypothesis was first initiated by Wachtel (1942) and has been widely supported in many studies including Rozeff and Kinney (1976), Keim (1983), Reinganum (1983), Griffiths and White (1993), Arsad and Coutts (1997), Coutts (1997), and Draper and Paudyal (1997). However, the tax-lossselling hypothesis was first challenged by Constantinides (1984) on the grounds of investors' rationality.…”

The January effect and monthly seasonality in the Hang Seng index: 1985-97

“…Of course, there is much evidence to suggest that security returns are non-normal, in the form of 'fat tails' and display the simultaneous properties of heterogeneity and serial correlation (see, for example, Fama, 1965, Badrinath and Chatterjee 1988, 1991, and Mills e t al., 1996. Various approaches to this problem have appeared in the anomalies literature and these are summarized by Coutts (1997). However, we employ both the parametric t-statistic and F -statistic and the nonparametric Kruskall-Wallis statistics, the latter statistic, of course, makes no distributional assumptions concerning the employed stock returns.…”