Investment choices are heavily dependent on investor preferences and investment decision methodology. When it comes to the latter, there has been one particular phenomenon in empirical market dynamics that has traditionally flummoxed market analysts and quants: the “January Effect”. In this phenomenon, observed market volumes (and volatility) seen across the calendar month of January over the last couple of decades are generally higher than in the rest of the year. Furthermore, institutional quants generally consider them to be more optimistic than in the rest of the year.

This is something of a problem towards rationalizing market trajectory: there is a plethora of data and analytics from nearly hundreds of sources that institutional quants pore over to get a sense how markets should shape up over the near future. Barring major upsets, this “sense of shape” is supposed to hold true. The “January Effect” is deemed to be an outlier in that it nearly always dents this idea of “shape”.

Over the years, institutional quants have made numerous studies and attributed probable causes without any strong consensus being developed. For instance, some quants argue that this “bump” in January is likely due to increased inflows in January from asset managers who have received additional capital from their clients by the end of the previous year; when they make investments to fulfil their clients’ mandates, instrument prices are influenced, which other investors piggyback on to exacerbate. Others argue that the effect is for “psychological” reasons: clients, advisors and investment managers have stronger convictions following year-end vacations and make investment decisions accordingly – which get corrected or strengthened as the months roll past.

“Cultural” reasons on account of increased participation of investors in the Eastern Hemisphere also finds some mention: since the Chinese/Lunar New Year generally rolls in around the beginning of the Gregorian year’s calendar, some quants attribute increased trading activity as a form of “gambling for good luck” contributing to the “January Effect” as well.