Can the January anomaly in Taiwan's stock market be explained by the prospect theory?

Chien, Chin-Chen; Chen, Tsung-Cheng

doi:10.1080/14697680701446922

Cited by 9 publications

(7 citation statements)

References 6 publications

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“…Following Chien and Chen (2008) and prior research, this study uses monthly stock index returns collected from the TEJ database[5]. Specifically, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine our hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect[6].…”

Section: Methodsmentioning

confidence: 99%

“…This study uses the conventional and standard dummy variable regression model, as employed in Chien and Chen (2008), Lucey and Zhao (2008), Mehta and Chander (2009), Depenchuk et al (2010), and He and He (2011), and further includes some control variables for firm, industry and macro-economic level factors, as follows: where R t is the industrial index return for month t , D t is a dummy variable equals to 1 in the specific month, generally for January, and 0in the other months of the year, and ε t is the stochastic disturbance term. The Salegrowth t is the firm level growth rate of sales, measured by the average of monthly sales growth rates of all listed firms in each industry.…”

Section: Methodsmentioning

confidence: 99%

“…2. According to survey conducted by the Taiwanese SEC, individual investors constituted approximately 60 percent in Taiwan’s stock market. In addition, the evidence in Taiwan for existence of the January seasonality is also mixed (Lee, 1992a, b; Tong, 1992; Cheung et al , 1994; Chien and Chen, 2008). …”

Section: Notesmentioning

confidence: 99%

“…Rozeff and Kinney (1976) first documented this seasonal pattern in a weighted index of prices on the NYSE for 1904-1974, finding that stock returns in the first month of the year were statistically larger than the other months. The extensive literature on the subject since the 1980s generally provides clear evidence that the January effect is a stock market anomaly (Brown et al , 1983; Gultekin and Gultekin, 1983; Kato and Schallheim, 1985; Reinganum and Shapiro, 1987; Lee, 1992a, b; Baker and Limmack, 1998; Chui and Wei, 1998; Cheung and Andrew Coutts, 1999; Chien and Chen, 2008). Although many explanations for this effect have been suggested and examined, the findings are still inconsistent and puzzling[1].…”

Section: Introductionmentioning

confidence: 99%

“…Behavioral finance, which assumes that the information structure and characteristics of market participants systematically affect individuals’ investment decisions as well as market outcomes, proposes various psychology-based theories that attempt to explain stock market anomalies. Specifically, Chien and Chen (2008) offered a new explanation of the disposition effect for seasonality by empirically investigating the impact of the stock performance in the preceding December on the January anomaly in Taiwan’s stock market. Chen and Chien (2011) indicated the relationship between culture bonus and size effect in Taiwan by applying the mental accounting and house money concepts in investors’ behavior.…”

Section: Introductionmentioning

confidence: 99%

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The role of house money effect and availability heuristic in investor behavior

Chen

Cheng

Lin

et al. 2017

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Purpose The house money effect is proposed to describe that people appear to consider large or unexpected wealth gains to be distinct from the rest of their wealth, and are thus more willing to gamble with such gains than they ordinarily would be. On the other hand, the availability heuristic describes that people tend to have a cognitive and systematic bias due to their reliance on easily available or associational information. The purpose of this paper is to employ these behavioral perspectives in an empirical model regarding the January anomaly to explore investor behavior in Taiwanese stock market with bonus culture and well-known electronics industry. Design/methodology/approach This study uses the conventional and standard dummy variable regression model, as employed in prior studies, and further includes some control variables for firm, industry and macro-economic level factors. Moreover, 19 industrial indices for Taiwanese stock market over the period January 1990 to December 2014 are included in this study to examine the hypotheses, except for the 1997 Asian financial crisis and the global financial crisis period of 2007-2009 to avoid the potential effect. On the other hand, the authors also use the entire sample period of 1990-2014 for understanding whether the magnitude of January effect is different. Findings The empirical results indicate that Chinese bonus payments in January induce a strong January effect in the Taiwanese stock market, especially when most listed firms have positive earnings growth in the preceding year, suggesting a house money effect. Moreover, this study further provides some preliminary evidence that the higher January returns due to bonus culture are apparent only in the electronics industry when both Chinese New Year and bonus payments are in January, implying the role of availability heuristic based on the electronics stocks in investor behavior before the impending stock exchange holidays. Some robust tests show qualitative support. Research limitations/implications The major contribution of this study is to extend the existing research by incorporating cultural and industrial factors with behavioral finance, thus enriching the literature on the causes of seasonality for Asian stock markets. Practical implications This study also has behavioral implications of investments for investors in the Taiwanese stock market, especially for foreign institutional investors which pay close attention to this market. Originality/value This study first applies and examines the culture bonus hypothesis with regard to how employees who receive culture bonuses in January can change their attitudes toward risk and induce the January effect from the concept of mental accounting. Moreover, this study further proposes and examines the extended culture bonus hypothesis related to how the January effect due to culture bonus is different for the electronics and non-electronics industries when taking into account the stock market holidays from the concept of availability heuristic.

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Section: Methodsmentioning

confidence: 99%