CRITICAL REVIEW PAPER

Critical Review Paper



Critical Review Paper

Critical Analysis: To What Extent Does The January Effect Anomaly Exist Amongst Different Sectors of the UK Stock Market?

In this dissertation, the researcher has achieved all his aims objectives by reviewing a range of published academic research regarding stock market efficiencies, anomalies and the January effect. This paper was produced to examine the extent of the January effect anomaly in today's UK market (London Stock Exchange) through categorizing a sample of 28 stocks into 5 different industrial sectors. The sectors examined were; Investment Trusts, Energy, Emerging Markets, Media and General Retail. The article briefly explains that there are many other stock market anomalies such as the excess volatility effect and the overreaction effect but the basis of this study is the January effect. The research, analysis and conclusion for the studies are based on the collection and processing of secondary data. The January Effect amongst different industries in the UK stock market is examined in this paper. Corporations and their stock prices from the London Stock Exchange are used. Various studies have proved the January Effect to be a small cap phenomenon.

I believe that the analysis was robust as some interesting findings have been raised. In nearly all cases, when the returns in January were not high, the results only had small fluctuations, which represent small volatility. This pattern was consistent throughout all the graphs studied for each sector and with the sample as a whole. These findings could be a new type of anomaly related with safe investments because volatility is a representation of the risk an investor faces with the stocks. More risk adverse investors can use this information if they have views similar to a technical financial analyst. Small cap stocks in the London Stock Exchange can be held over the month of January by more risk adverse investors as there is less risk associated over this period of time. This is a buy and hold strategy. The method of analysis was processing stock prices into returns and then graphically displaying the returns. These results showed no phenomenal returns in January to support the concept of the January Effect. The main target of this paper regards the presence of the January Effect amongst different sectors of the UK stock market and is represented through the research question. This area of research differs from previous studies as the UK market (London stock exchange) has rarely been studied in the past.

I firmly believe that the researcher in dissertation clearly explains that the area of stock market anomalies has been a topical area for financial academic research for a long time. This will continue to be the case for a long time to come as investors are always looking for inefficiencies in the market to exploit in order to make abnormal returns. This research has raised topics that can be further studied by researchers to gain a better understanding of the results that have been achieved. The January Effect has been outdated to a ...