Stochastic dominance, tax-loss selling and seasonalities in Sweden

This paper examines two potential explanations of the January effect in the Swedish stock market for the period from January 1919 to December 1994; The tax-loss selling hypothesis and the omitted risk factor hypothesis. We document significantly higher returns in both January and July over the sample period. In addition, there is a seasonal pattern in the variances of the monthly returns. There also seems to be an interaction between the variance and the mean effects. We identify six different tax regimes where capital gains and losses are treated differently, and test whether tax regime changes have an influence on the January effect. Price pressures and rebounds implied by the tax-loss selling hypothesis are also analysed. Finally, we use the concept of stochastic dominance to study if the higher returns are due to compensation to investors for bearing higher risk. However, we find no support for either of the proposed hypotheses.