JANUARY EFFECT ON KARACHI AND JAKARTA STOCK EXCHANGES

BY

ISHFAQ UR REHMAN

A Thesis Submitted to the Faculty of the Institute of Management

Sciences, Peshawar in Partial Fulfillment of the Requirements for
the Degree of

BBA (Finance)

Institute of Management Sciences, Peshawar

2011-15

Certificate of Approval

I certify that I have read JANUARY EFFECT ON KARACHI AND JAKARTA STOCK
EXCHANGE by Ishfaq Ur Rehman, and that in my opinion this work meets the criteria for
approving a thesis submitted in partial fulfillment of the requirements for the BBA- Finance at
the Institute of Management Sciences, Peshawar

Supervisor

Name: Dr. Yasir Kamal

Designation: Assistant Professor
Signature: ________________

Coordinator Research and Development Department

Name: ____________________
Signature: ________________

Declaration
I hereby declare that the research work submitted to R&DD by me is my own original
work. I am aware of the fact that in case my work is found to be plagiarized or not
genuine, R&DD has the full authority to cancel my research work and I am liable to
panel action.

Students Name: Ishfaq Ur Rehman

Date: 28 th December, 2015

Dedication

This research is
dedicated to my
Parents.
For their endless love, support and
encouragement

Abstract

This study examines the January effect in Karachi Stock Exchange and Jakarta Stock
Exchange by finding monthly closing indexes for the period of January 2000 to
December 2014. The presence of January effect could create hurdle for the efficient
market hypothesis. Hypothesis are tested for the equality in mean returns on monthly
basis using the one way ANOVA test. The result generated by the ANOVA are not
significant and the results of the study shows that there is no January effect in Pakistan
and Indonesia stock equity market. This study also shows large mean return for the month
of December in both KSE and Jakarta stock exchange and the investors of both the
countries can perform very well in December. In Karachi stock exchange output Along
with December, April and July also shows high return but less than December. Similarly
in case of Jakarta Stock Exchange July and September shows high return but less than
December. Hence it shows that Only December shows high return.

Acknowledgement
First of all I would like to thanks Almighty ALLAH, The Superior and The
Sovereign, who enabled and guide me in completing this mammoth
task. I would also like to express my sincere gratitude to my respected
supervisor Dr. Yasir Kamal for the continuous support, his patience,
scholarly advice, continuous encouragement, kind supervision and
timely checking of my manuscript throughout the course of study. I
think without his guidance and sincere efforts, I would not have been
able to shape my study in this form.
Furthermore, I would like to extend my gratitude to all those individuals
who helped me in completing my task specially my good friends. At the
end I would not forget to thanks my loving parents who supported and
encouraged me throughout my educational career.

ISHFAQ UR REHMN

List of Acronyms and Abbreviation

KSE

Karachi Stock Exchange

US

United States

NYSE

New York Stock Exchange

TABLE OF CONTENTS

Contents
Declaration................................................................................................................. ii
Dedication.................................................................................................................. iii
Abstract..................................................................................................................... iv
Acknowledgement...................................................................................................... v
List of Acronyms and Abbreviation............................................................................ vi
List of Table............................................................................................................... vii
Chapter 1: Introduction.............................................................................................. 1
1.1

Background of the study................................................................................1

1.2

Tax loss Selling Approach...............................................................................2

1.3

Window Dressing........................................................................................... 2

1.4

The January Effect in the Popular Press..........................................................3

1.5

Problem Statement........................................................................................ 4

1.6

Objectives of the study.................................................................................. 4

1.7

Limitation....................................................................................................... 4

Chapter 2: Literature Review...................................................................................... 5

Chapter 3: Methodology............................................................................................. 9
3.1

Dependent Variable....................................................................................... 9

3.2

Independent Variable..................................................................................... 9

3.3

Data Sources.................................................................................................. 9

[Type text]

3.4

Sample Selection........................................................................................... 9

3.5

Hypothesis................................................................................................... 10

Chapter 4: Analysis.................................................................................................. 11
4.1

Discussion of the result................................................................................ 11

4.1.1

Karachi Stock Exchange:.......................................................................11

4.1.2

Jakarta Stock Exchange.........................................................................13

Chapter 5: Conclusion.............................................................................................. 15
References................................................................................................................ 15

[Type text]

List of Table
Table 1
Descriptive
12

Table 2
ANOVA.12

Table 3
Descriptive.1
4

Table 4
ANOVA.14

Chapter 1: Introduction
1.1

Background of the study

Several research study, example Hirsch [1986] and Hensel and Ziemba (1995) Brown and
Luo (2006) Copper, and Marshall and Visaltanachoti (2008) have shown the benefits of
anomalous return behavior of the January Effect and also called it January Effect. It was
the Hirsch (1974) who described the January Effect as the stock market goes in January,
so goes the rest of the year. It means that if the stocks are going well in the month of the
January then it will have automatically positive impact on the rest of the months and will
have high return and if the stocks in the January are not fine then it will have negative
impact on the rest of the year.
Rozeff and Kinney in 1976 found that the January effect is proper custom in which stocks
markets earn higher return as compared to rest of the year. According to Ercan balaban
(1995) A major finding in most of the empirical research on monthly seasonality in stock
markets is the so called January Effect concerning abnormal returns during this month
compared to the rest of the year
Different researchers in different period of time tried to investigate the January Effect and
used different markets and different methods. They came to the conclusion that the
January Effect exist only in the US market and the rest of the markets are free from it.
However there was no explanation to prove the existence. Stivers, Sun and Sun (2009)
tried to find the explanation and hence they collect data from different international
markets and US market. They came across with three results: The January Effect might
be attributable to a priced risk factor, The January Effect is related to a Pervasive and
persistent behavioral bias or the January Effect might just be a statistical aberration with
1

no underlying economic explanation or it might be tied to a specific period of history as

realized return responded to the economics and trading environment at the time.
Previous studies showed that the difference in 11 months returns following positive and
negative Januaries that are frequently in excess of 10% but January Effect is easy for
implementation. Its transaction cost is also lower other quantitative strategies. Thus short
position can easily be created. Finally the information required to January return is
readily available. January effect returns are neither economically different nor statistically
significantly different to buy and hold returns.

1.2

Tax loss Selling Approach

One of the major reason for January effect is Tax-loss selling. This approach tell that
investors try to sell their stocks in month of December to illuminate the capital losses.
The investors show capital loss which result in the reduction of tax expense on the profit.
The stock shows downward tendency while bringing the prices of the stocks down and
the investors invest once again at the start of the new year which shows upward tendency
and hence the prices of the stocks moves up.
Starks et al (2004) proved that January effect in Municipal Bond Close End Fund is as a
result of tax-loss selling activities. The study also shows that selling force is established
in December because the investors sell the stocks in December and reinvest in January so
that they can cover their losses. Hugen and Wishem (1973) and Reinganum (1983) also
supported the concept that January Effect is due to the tax loss selling effect.

1.3

Window Dressing
This approach explain that the value of stocks of small firms moves upward in January
due to two reasons. First due to Tax loss selling and second due to institutional portfolio

rebalancing. However Eakins and Seweell (1994), Leigon (1997) do not agreed upon
this point. They proved that it is not significant to use window dressing for January Effect
and windows dressing is not capable to explain the behavior of January Effect.

1.4

The January Effect in the Popular Press

As January goes, so goes the rest of the year has been published in 1973 by The Wall
Street when Yale Hirsch used the term January Effect. The regular prevalent press
account emerges in the first week of January and asks an academic and professional
trader whether the stock market return for the current January is likely to be an originator
of stock market return over the remnants of the year.
As best it can be conclude, the use of the January market return as an interpreter of
returns throughout the remnants of the year formulated its first arrival in print in the 1972
edition of Yale Hirschs Stock Traders Almanac.
We doubt that any method or indicator ever formulated has been as amazingly precise as
the January Effect. The Effect, which point out that as January goes, so will the market go
for the rest of the year, has upheld true in 20 of the last 24 years. The execution of this
forecaster turn into even more prominent when you judge its simplicity, linked with the
fact that it is making its forecast eleven months in advance. Very few stock market
indicators show such an 83.3 percent precision for even small periods of time. Comments
and recommendations concerning the forecasting power of January stock market returns
for market returns over the rest of the year have shown in the well-known press regularly
ever since.

1.5

Problem Statement

The main theme of this study is to find out either January effect exist in Karachi and
Jakarta Stock Exchange or not. Does this effect shows any importance to the investment
decision process?

1.6

Objectives of the study

The main objectives of this study is
1.
2.

1.7

Investigation of January Effect on KSE and Jakarta Stock Exchange

To help out investors while investing in Karachi and Jakarta Stock Exchange

Limitations
1.

It requires a large amount of time to conduct a research to get precise output.

2.

The larger the number of observation the lesser will be the chances of mistakes
and highly accurate will be the result. There is less number of Observation
available to get the result.

3.

This research is conducted for Karachi and Jakarta stock exchange so it is not
possible to implement the result all over the world.

Chapter 2: Literature Review

The January Effect was first used as trading strategy for investing in the stock market in 1973
(Cooper et al. (2006)). According to Yale Hirsch (1974) As the stock market goes in January, so
goes the rest of the year. Bloch and Pupp (1983) conducted a research based on S&P 500 and
select data from 1950 until 1982. They found out that January Effect has no influence on the
4

returns of the following eleven months of the year. The tests used in their papers did not included
any statistical inference.
In 1995 two research papers were published and both the papers were written by Hensel and
Ziemba in 1995. The first, Hensel and Ziemba (1995a), was based on how accurate is the January
Effect while collecting data from S&P 500 for the time period of 68 years ranging from 1926 to
1993. Their result showed that January Effect is only profitable when the return is positive in the
month of January and if the return is negative in the month of January then using January Effect
as a trading strategy will have no impact on the rest of the month. However they do not provide
any explanation to support their results in the favor of the January Effect. In their second paper,
Hensel and Ziemba (1995b) they tested international markets for the prediction of January
Effect. They concluded that January Effect has an impact on four market other than US market
but when the January has positive impact and if January has negative returns than its not
applicable to predict the values for the rest of the months. This result resemble with the first
paper result and still there is no explanation to support their findings.
Brown and Luo (2006) explained that too much care should be taken to interpret the result of
Hensel and Ziemba. They provide two reasons for it. First, Brown and Luo found that Hensel and
Ziemba only compare the stock performance of those eleven months which are followed by the
positive January Return. It could be possible that another month has more predictive power for
the following eleven months than January or the negative return of other month might have more
predictive power over the following eleven months. Second they mention that Hensel and
Ziemba have ignored the factor of risk in their investment strategies and only used average mean
stock return as their performance measure. Brown and Luo (2006) started the same research once
again and take the data from the New York stock Exchange for listed companies from 19415

2003. They took into consideration all the above points and find out result by using different
performance measures like Median Return, the Mean return and the Sharpe ratio. They
concluded that Januaries cannot be used as investment tool if the returns are positive however it
give a signal to investor to take out the investment from the market when the return are found
negative. Then they mention the element of risk and used sharp ratio. By taking twelve months
average return following negative Januaries the lowest. They find out that the average twelve
month however was not negative and hence the January Effect exist when the January return
were positive and the risk was taken. And the January Effect doesnt have predictive power when
the January has negative return.
After the Brown and Luo (2006) finding the January Effect became very popular and hence the
researcher start working on it to increase its validity. Cooper et al. (2006) conducted research on
January Effect and include one more variable of statistical inference. They used data from
NASDAQ, Amex, and NYSE. They tested for statistical significance by estimating an ordinary
least squares time-series regression with the eleven months return as dependent variable and a
dummy variable as explanatory variable, which took value 1 if the January return was positive
and 0 otherwise. Cooper et al. (2006) concluded that January have a predictive power for the
following eleven months. They explain that: when January returns are positive the returns over
the following eleven months are much more likely to be positive and higher than returns that
follow a negative January.
After Cooper et al. (2006) in 2007 Easton and Pinder conduct a research and comment on the
Cooper et al. (2006) that Given the absence of theoretical support for the existence of such an
effect, its usage, as suggested by Cooper et al. (2006), would be strengthened by its existence
across sub-periods and across different markets. Therefore Easton and Pinder (2007) conducted
6

their own study on January Effect and take Thirty Eight international countries. By collecting
data they found that April, June and October had more predictive power over the return of the
following months than January has. Therefore they concluded that using January Effect as a
trading strategy does not make any sense.
All the above studies did not explain well about the use of January Effect. However Cooper et al.
(2006) and Visaltanachoti (2008), the January Effect was used by the traders to that they can
predict about their investment for the rest of the year. Cooper, McConnell and Ovtchinnikov
(2009) wrote a research paper on finding the best way to find out the best way using January
Effect. They collected data from 1857 to 2003 and compare different strategies of high return.
They found that returns following positive Januaries are larger than the returns of the months
following negative Januaries. Cooper at el (2009) also tested this strategy. They also give
explanation for their result that a trader shouldnt leave the market in the month of January
because of the January Effect and they found that the average return of the negative Januaries is
positive. They mean that if the traders sell the stocks in the eleven months due to negative
January they will face loss.
Marshall and Visaltanachoti (2010) take January Effect as a trading strategy. They wants to know
either January Effect can be used to earn economic profit. They stated that as January Effect is
easy to implement thus it is a good trading instrument. It give prediction for just one year and
hence the transaction costs are lower than other strategies. They also investigated and found that
there are other 17 international markets where the concept of January Effect is workable. They
used simple spread method and found that UK and Spain had statistically different 11 month
return in periods following positive Januaries and periods following Negative Januaries.

Xiuqing Ji, Baruch found that January is not different from the rest of the year return before the
implementation of income taxes in 1917. The stock return in January has been found in greater
profit as compared to the Non January months. Furthermore, Mainland and Hong Kong in China
are not affected by the January effect because there are no capital gains taxes in Hong Kong and
has no influence on trading decisions. The evidence prove that tax-loss-selling assumption is the
main reason for this abnormal behavior of January.
Griggs, Frank T (2007) concluded that the most interesting month of the year is January. January
shows abnormal high return in the month of January and also have the power of predictability for
the rest of the months return. This paper support that the sign of the January means return can tell
about the rest of the months return.

Chapter 3: Methodology
This section determine the nature of variables. We have two variables. One is dependent variable
and the other is independent variable.

3.1

Dependent Variable

Stock market return is considered as dependent variable because we want to find out the impact
of January on the return of stock.
A lump sum is generated in the secondary market by the buying and selling of stocks in
secondary market and this lump sum amount is known as Return.

3.2

Independent Variable

There is only one independent variable and that is January Effect. Different return occurs in
different months of the year. Some months have high return while others have a lower return.

3.3

Data Sources

The data used in this research is secondary data because it is not possible to collect it from
individual or from other data collection instrument. Thus data has been gather from yahoo
finance website.
www.yahoofinance.com

3.4

Sample Selection

The sample of the data is taken for the KSE and Jakarta Stock Exchange. Monthly return has
been calculated and is analyzed for the output.

We calculate the return by the following formula.

SR = ln KSE 100t KSE100 t-1

Where SR represent stock return, ln is the natural log, KSE 100t shows the recent value and
KSE100t-1 shows preceding period index value. To find out the January effect we use the adjusted
close value.
Similarly Jakarta stock return has been found by the same formula and was analyzed by SPSS
software for further study.

3.5

Hypothesis

H0: January Effect exist in KSE and Jakarta Stock Exchange.

H1: January Effect does not exist in KSE and Jakarta Stock Exchange.

Chapter 4: Analysis
4.1

Discussion of the result

4.1.1 Karachi Stock Exchange:

10

Table 1 shows the descriptive statistics for KSE in which total of 180 means of monthly return
has been explained from the period of January 2000 to December 2014 along with upper and
lower bounds at a 95% confidence interval. It also explain that the month of April, July and
December shows a positive means return while the rest of the months shows negative mean
return. December has the highest mean return while October shows the lowest mean return. In
case of standard deviation December shows high variation while May shows less variation. The
column standard error shows risk return relationship. December shows the highest value for
standard error while may has the lowest.
In Table 2 F value for the January effect is .917 with 11 degree of freedom between the groups
and 168 within groups. The P value is .526 at 5% confidence interval which is greater than .05
thus the study reject the alternative hypothesis and accept null hypothesis and concluded that
January Effect does not exist in Karachi Stock Exchange.

Table 1
Descriptive

11

Return
95% Confidence Interval for Mean
N

Mean

Std. Deviation

Std. Error

Lower Bound

Upper Bound

January

15

-.033366

.0743503

.0191972

-.074540

.007808

February

15

-.036572

.0633757

.0163635

-.071668

-.001476

March

15

-.022630

.0472934

.0122111

-.048820

.003561

April

15

.037197

.1045470

.0269939

-.020700

.095093

May

15

-.019208

.0416859

.0107632

-.042293

.003877

June

15

-.016256

.0764740

.0197455

-.058606

.026094

July

15

.005697

.0866442

.0223714

-.042285

.053679

August

15

-.012542

.0568729

.0146845

-.044037

.018953

September

15

-.035485

.0689038

.0177909

-.073643

.002673

October

15

-.006731

.0628651

.0162317

-.041545

.028083

November

15

-.010979

.1449652

.0374299

-.091258

.069300

December

15

.649564

2.6850753

.6932835

-.837381

2.136510

Total

180

.041557

.7769099

.0579074

-.072712

.155827

Table 2
ANOVA

Return
Sum of Squares df

Mean Square

Sig.

Between Groups

6.117

11

.556

.917

.526

Within Groups

101.925

168

.607

Total

108.042

179

4.1.2 Jakarta Stock Exchange

Table 3 shows the descriptive statistics for Jakarta stock exchange in which same number means,
as evaluated for Karachi stock Exchange, total of 180 has been explained for the same period as
12

considered for the Karachi stock Exchange along with upper and lower bounds at a 95%
confidence interval. It also explain that the month of July, September and December shows a
positive means return while the rest of the months shows negative mean return. Hence it shows
that both in KSE and Jakarta stock exchange, 3 months in both shows positive results while the
rest of the months shows negative results. December has the highest mean return while April
shows the lowest mean return. In case of standard deviation December shows high variation
while November shows less variation among all. The column standard error shows risk return
relationship. December shows the highest value for standard error while November has the
lowest standard error.
In Table 4 F value for the January effect is .990 with 11 degree of freedom between the groups
and 168 within groups. The P value is .458 at 5% confidence interval which is greater than .05
and this result give the required result which the research wants to find. Thus the study reject the
alternative hypothesis and accept null hypothesis and concluded that there is no relationship
among the means of the months for Jakarta Stock Exchange.

Table 3
Descriptive

13

Return
95% Confidence Interval for Mean
N

Mean

Std. Deviation

Std. Error

Lower Bound

Upper Bound

January

15

-.005877

.0396249

.0102311

-.027821

.016066

February

15

-.019296

.0643410

.0166128

-.054927

.016334

March

15

-.036315

.0796808

.0205735

-.080440

.007811

April

15

-.002538

.0805654

.0208019

-.047153

.042078

May

15

-.017504

.0476148

.0122941

-.043872

.008864

June

15

-.028617

.0579282

.0149570

-.060696

.003463

July

15

.031686

.0504209

.0130186

.003764

.059609

August

15

-.006979

.0911543

.0235359

-.057459

.043500

September

15

.014855

.1151428

.0297297

-.048909

.078619

October

15

-.016109

.0482928

.0124692

-.042852

.010635

November

15

-.038568

.0375954

.0097071

-.059387

-.017748

December

15

.555646

2.2122712

.5712060

-.669469

1.780761

Total

180

.035865

.6418120

.0478378

-.058533

.130264

Table 4
ANOVA
Return
Sum of Squares df

Mean Square

Sig.

Between Groups

4.488

11

.408

.990

.458

Within Groups

69.246

168

.412

Total

73.734

179

Chapter 5: Conclusion

14

This paper investigate that Either January Effect really exist in Karachi and Jakarta Stock
Exchange or not. If this effect exist, how it can affect the investors decision of investment in
stocks. ANOVA has been used to determine the January effect on Karachi and Jakarta Stock
Exchange. Monthly return were calculated from Adjusted Close prices for the period of January
2000 to December 2014. At 5% confidence interval the result shows that the monthly mean
return are not significant and most of the month have negative mean return which shows to the
investors that during these months the trading volume is low in both Karachi and Jakarta Stock
Exchange. In the month of December the mean return is positive in both Karachi and Jakarta
Stock exchange which can be used as a benchmark instead of January. Hence the investors can
use high profit in the month of December.

References
I.

Bloch, H. and Pupp, R. (1983). The January Effect revisited and rejected. Journal of
Portfolio Management,9(2), 48-51.
15

II.

Brown, L. & Luo, L. (2006). The January Effect: Further Evidence, Journal of Investing,
spring, 25 31.

III.

Cooper, M.J., McConnell, J.J. & Ovtchinnikov, A.V. (2006). The Other January Effect,
Journal of Financial Economics, 82, 315 341.

IV.

Cooper, M.J., McConnell, J.J. & Ovtchinnikov, A.V. (2009). Whats the best way to trade
using the January Effect?, Journal of Investment Management forthcoming.

V.

Easton, S.A. & Pinder, S.M. (2007). A Refutation of the Existence of the Other January
Effect, International Review of Finance, 3-4 (7), 89 104.

VI.

Griggs, Frank T (2007) Grand Valley State University Another January Effect.

VII.

Hensel, C. & Ziemba, W. (1995a). The January Effect, Journal of Investing, 4(2),
Summer, 67 70.

VIII.

Hensel, C.R. & W.T. Ziemba (1995b). The January Effect: European, North American,
Pacific and worldwide results, Finanzmarkt und Portfolio Management, 9 (2), 187 196.

IX.

X.

Hirsch, Y. (1974). Stock Traders Almanac. The Hirsch Organization. Nyack. NY.

Laura T. Starks, Li Yong & lu Zheng (2005). Tax-Loss Selling and the January Effect.
Evidence from Municipal Bond Closed End Funds
16

XI.

Lakonishok, J, & Smidt, S. (1984). Volume and turn-of-the-year behavior. Journal of

Financial Economics, 435-455.

XII.

Marshall, B.R. & Visaltanachoti, N. (2008). How Accurate is the January Effect?,
Working Paper, Massey University Palmerston North, New Zealand.

XIII.

Marshall, B.R. & Visaltanachoti, N. (2010). The other January effect: Evidence against
market efficiency?, Journal of Banking and Finance, 34(10), 2413-2424.

XIV.

Stivers, C., Sun, L. & Sun, Y. (2009), The other January effect: International, style, and
sub period evidence, Journal of Financial Markets, 12, 521-546.

17