Financial Econometrics- Assignment 1
Name: Kwan Siu Pong
Lecturer’s name: Jérémie Lefebvre
3 October, 2011

Introduction
The January effect is a calendar-related anomaly in the financial market where financial securities tend to raise in January. It is a well known model to explain the anomalous behavior in security markets throughout the world. In the past January, stocks with small market capitalization tended to generate higher returns than stocks with greater market capitalization. It provides an opportunity for investors to generate a profit through buying stocks for lower prices before January and then selling them after their values rise.
The January effect was first introduced by investor banker Sindey B. Wachtel in, or before 1942. Its reintroduction in 1972 had brought a greater impact than the initial article and further proved its existence. However, many people expected that this phenomenon would disappear quickly as investors would attempt to exploit it. Through different adjustments and investors’ behaviors, the effects of January effect were expected to reduce. In order to prove the existence of January effect again, Haugen and Jorion had made a study in 1996. They used a simplistic model to analyze the impacts of January effect before and after its reintroduction respectively. Interestingly, the result was not same as the expectation of the public. January effect still existed.
To further verify January effect, we would introduce a more sophisticated pricing model, Fama-French to Haugen and Jorion’s paper. We would examined the monthly returns to New York Stock Exchange firms from 1926 to 2011 to test whether January effect is still effective after introducing more factors into CAPM. The results showed different answers to us. Under CAPM, January effect was proved to be existed. But, stock returns were not outperformed in January when we used