CALENDAR EFFECT

The general hypothesis that certain months of the year provide above average return on stock investment is an old age argument. The most common calendar effects are the Monday effect, January effect and October effect. Because investors and speculator are keenly aware of these days and months of the year, they help to auto stimulate the phenomenon. The January effect which is an increase in the demand for stocks that it leads to a rally in prices can be attributed to the unspent December bonuses and other year-end financial reward/incentives that are put to work in January in the equity market leading to an increase in demand for stocks.  It can also be attributed to peoples new year resolution to invest and save for their future retirement and January being the first month of the new year sees a strong desire to follow through on their resolution, also because of the strong superstitious psychological expectation of gains in January effect, the  fear of missing out (FOMO) in the price rally draws in more speculator into the market making the effect a more too real self-fulfilling prophecy rather than a logical phenomenon based on fundamental analysis of the market. January effect actually makes nonsense of the efficient market hypothesis which states that all information is already reflected in the price of the stocks and thus you cannot use any new information to gain abnormal returns on your chosen stock. So the rally in price in January is not due to any new financial information not reviewed in December to the market but it is just a belief or emotion (FOMO FACTOR) that prices will appreciate.

Gazing through NSE ASI data to check if January effect  is statistically significant is neither here nor there, this might be due to the fact that the NSE is dominated by just five highly capitalized stocks (the big five namely Dangote cement, GTB, Nestle, NB, Zenith bank) which has a combined capitalization of N8.6 trillion representing 63% of the total market capitalization has the potential to make the NSE ASI not to be too representative of the overall effect of January appreciation. But considering the numbers of listed equity that have appreciated in price, January has witness more significant appreciation than depreciation over the preceding month.