IDEAS home Printed from https://ideas.repec.org/a/spr/jecfin/v45y2021i4d10.1007_s12197-021-09550-y.html
   My bibliography  Save this article

The clientele effect around the turn of the year: evidence from the bond markets

Author

Listed:
  • Vladimir Kotomin

    (Illinois State University)

Abstract

Studying the returns of US Treasury, corporate, and municipal (muni) bonds at the index level over 2004-2020, I find a strong turn-of-the-year effect – low December returns and high January returns – in the high-yield muni index. The investment-grade muni index exhibits a similar but weaker effect. High-yield munis is the only class whose December returns are negatively correlated with year-to-date yield changes. Dominance of highly tax-sensitive households who engage in tax-loss selling, combined with opaqueness, low liquidity, and a small role of ETFs in munis make it difficult to arbitrage away the December price decreases. The investment-grade and high-yield corporate bond indices have abnormally high December returns in years with capital losses. The high-yield corporate index also has abnormally high December returns even in years without capital losses. It represents a change from the findings of prior research and suggests that corporate bond investors exhibit contrarian tendencies in December.

Suggested Citation

  • Vladimir Kotomin, 2021. "The clientele effect around the turn of the year: evidence from the bond markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(4), pages 637-653, October.
    • Handle: RePEc:spr:jecfin:v:45:y:2021:i:4:d:10.1007_s12197-021-09550-y
    DOI: 10.1007/s12197-021-09550-y
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s12197-021-09550-y
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s12197-021-09550-y?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Musto, David K, 1997. "Portfolio Disclosures and Year-End Price Shifts," Journal of Finance, American Finance Association, vol. 52(4), pages 1563-1588, September.
    2. Lakonishok, Josef, et al, 1991. "Window Dressing by Pension Fund Managers," American Economic Review, American Economic Association, vol. 81(2), pages 227-231, May.
    3. Chang, Eric C. & Pinegar, J. Michael, 1986. "Return seasonality and tax-loss selling in the market for long-term government and corporate bonds," Journal of Financial Economics, Elsevier, vol. 17(2), pages 391-415, December.
    4. Mark D. Griffiths & Drew B. Winters, 2005. "The Turn of the Year in Money Markets: Tests of the Risk-Shifting Window Dressing and Preferred Habitat Hypotheses," The Journal of Business, University of Chicago Press, vol. 78(4), pages 1337-1364, July.
    5. Sias, Richard W & Starks, Laura T, 1997. "Institutions and Individuals at the Turn-of-the-Year," Journal of Finance, American Finance Association, vol. 52(4), pages 1543-1562, September.
    6. Haiwei Chen & Jim Estes & Thanh Ngo, 2011. "Tax Calendar Effects in the Municipal Bond Market: Tax‐Loss Selling and Cherry Picking by Investors and Market Timing by Fund Managers," The Financial Review, Eastern Finance Association, vol. 46(4), pages 703-721, November.
    7. Park, Sang Yong & Reinganum, Marc R., 1986. "The puzzling price behavior of treasury bills that mature at the turn of calendar months," Journal of Financial Economics, Elsevier, vol. 16(2), pages 267-283, June.
    8. John H. Cochrane, 1999. "Portfolio advice of a multifactor world," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 59-78.
    9. Rozeff, Michael S. & Kinney, William Jr., 1976. "Capital market seasonality: The case of stock returns," Journal of Financial Economics, Elsevier, vol. 3(4), pages 379-402, October.
    10. Lynch, Andrew & Puckett, Andy & Yan, Xuemin (Sterling), 2014. "Institutions and the turn-of-the-year effect: Evidence from actual institutional trades," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 56-68.
    11. Gjergji Cici & Alexander Kempf & Christoph Sorhage, 2017. "Do Financial Advisors Provide Tangible Benefits for Investors? Evidence from Tax-Motivated Mutual Fund Flows," Review of Finance, European Finance Association, vol. 21(2), pages 637-665.
    12. William F. Maxwell, 1998. "The January Effect in the Corporate Bond Market: A Systematic Examination," Financial Management, Financial Management Association, vol. 27(2), Summer.
    13. David K. Musto, 1999. "Investment Decisions Depend on Portfolio Disclosures," Journal of Finance, American Finance Association, vol. 54(3), pages 935-952, June.
    14. Laura T. Starks & Li Yong & Lu Zheng, 2006. "Tax‐Loss Selling and the January Effect: Evidence from Municipal Bond Closed‐End Funds," Journal of Finance, American Finance Association, vol. 61(6), pages 3049-3067, December.
    15. Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
    16. Jordan, Susan D. & Jordan, Bradford D., 1991. "Seasonality in Daily Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 269-285, June.
    17. Ogden, Joseph P., 1987. "The End of the Month as a Preferred Habitat: A Test of Operational Efficiency in the Money Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 329-343, September.
    18. R. David Mclean & Jeffrey Pontiff, 2016. "Does Academic Research Destroy Stock Return Predictability?," Journal of Finance, American Finance Association, vol. 71(1), pages 5-32, February.
    19. Griffiths, Mark D & White, Robert W, 1993. "Tax-Induced Trading and the Turn-of-the-Year Anomaly: An Intraday Study," Journal of Finance, American Finance Association, vol. 48(2), pages 575-598, June.
    20. Vladimir Kotomin & Stanley Smith & Drew Winters, 2014. "Interest-rate and calendar-time effects in money market fund and bank deposit cash flows," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(1), pages 84-95, January.
    21. Rakowski, David & Wang, Xiaoxin, 2009. "The dynamics of short-term mutual fund flows and returns: A time-series and cross-sectional investigation," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2102-2109, November.
    22. Kamstra, Mark J. & Kramer, Lisa A. & Levi, Maurice D. & Wermers, Russ, 2017. "Seasonal Asset Allocation: Evidence from Mutual Fund Flows," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 71-109, February.
    23. William Cheung & Scott Fung & Shih-Chuan Tsai, 2010. "Global capital market interdependence and spillover effect of credit risk: evidence from the 2007-2009 global financial crisis," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 85-103.
    24. Lawrence E. Harris & Michael S. Piwowar, 2006. "Secondary Trading Costs in the Municipal Bond Market," Journal of Finance, American Finance Association, vol. 61(3), pages 1361-1397, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Françoise LE QUERE, 2008. "L'habillage de portefeuille par les gérants de fonds dans la littérature : incitations, effets et risques," LEO Working Papers / DR LEO 870, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    2. Chen, Zhongdong & Schmidt, Adam & Wang, Jin’ai, 2021. "Retail investor risk-seeking, attention, and the January effect," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    3. Françoise Le Quéré, 2010. "L’habillage de portefeuille par les gérants de fonds dans la littérature : incitations, effets et risques," Revue d'Économie Financière, Programme National Persée, vol. 97(2), pages 275-293.
    4. Benjamin Munyan, 2015. "Regulatory Arbitrage in the Repo Market," Working Papers 15-22, Office of Financial Research, US Department of the Treasury.
    5. Cameron Truong, 2013. "The January effect, does options trading matter?," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 31-48, April.
    6. Lynch, Andrew & Puckett, Andy & Yan, Xuemin (Sterling), 2014. "Institutions and the turn-of-the-year effect: Evidence from actual institutional trades," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 56-68.
    7. Mark Griffiths & Drew Winters, 1997. "On a Preferred Habitat for Liquidity at the Turn-of-the-Year: Evidence from the Term-Repo Market," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(1), pages 21-38, August.
    8. Dbouk, Wassim & Jamali, Ibrahim & Kryzanowski, Lawrence, 2013. "The January effect for individual corporate bonds," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 69-77.
    9. Furfine, Craig H., 2004. "Public disclosures and calendar-related movements in risk premiums: evidence from interbank lending," Journal of Financial Markets, Elsevier, vol. 7(1), pages 97-116, January.
    10. Suliman Zakaria Suliman Abdalla, 2015. "An Investigation of the Month-of-The-Year Effect for the Sudanese Stock Market," Working Papers 924, Economic Research Forum, revised Jun 2015.
    11. Ortiz, Cristina & Sarto, José Luis & Vicente, Luis, 2012. "Portfolios in disguise? Window dressing in bond fund holdings," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 418-427.
    12. Baig, Ahmed & Winters, Drew B., 2018. "A preferred habitat for liquidity in term repos: Before, during and after the financial crisis," Journal of Economics and Business, Elsevier, vol. 99(C), pages 1-14.
    13. Wagner, Moritz & Lee, John Byong-Tek & Margaritis, Dimitris, 2022. "Mutual fund flows and seasonalities in stock returns," Journal of Banking & Finance, Elsevier, vol. 144(C).
    14. Easterday, Kathryn E. & Sen, Pradyot K., 2016. "Is the January effect rational? Insights from the accounting valuation model," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 168-185.
    15. Grinblatt, Mark & Keloharju, Matti, 2004. "Tax-loss trading and wash sales," Journal of Financial Economics, Elsevier, vol. 71(1), pages 51-76, January.
    16. Danny Yeung, 2012. "The Impact of Institutional Ownership: A Study of the Australian Equity Market," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 11, July-Dece.
    17. Shiu, Yih-Wen & Lee, Chun I. & Gleason, Kimberly C., 2014. "Institutional shareholdings and the January effects in Taiwan," Journal of Multinational Financial Management, Elsevier, vol. 27(C), pages 49-66.
    18. Mark Grinblatt & Matti Keloharju, 2000. "Tax-Loss Trading and Wash Sales," Yale School of Management Working Papers ysm148, Yale School of Management, revised 01 Nov 2002.
    19. Sikes, Stephanie A., 2014. "The turn-of-the-year effect and tax-loss-selling by institutional investors," Journal of Accounting and Economics, Elsevier, vol. 57(1), pages 22-42.
    20. Brown, Stephen J. & Sotes-Paladino, Juan & Wang, Jiaguo(George) & Yao, Yaqiong, 2017. "Starting on the wrong foot: Seasonality in mutual fund performance," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 133-150.

    More about this item

    Keywords

    Clientele effect; Turn-of-the-year effect; Tax-loss selling Municipal bonds; Mutual fund flows;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jecfin:v:45:y:2021:i:4:d:10.1007_s12197-021-09550-y. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.