Tax-loss selling and the January effect: Evidence from municipal bond closed-end funds

Abstract

This paper provides direct evidence supporting the tax-loss selling hypothesis as an explanation of the January effect. Examining turn-of-the-year return and volume patterns for municipal bond closed-end funds, which are held mostly by tax-sensitive individual investors, we document a January effect for these funds, but not for their underlying assets. We provide evidence that this effect can be largely explained by tax-loss selling activities at the previous year-end. Moreover, we find that funds associated with brokerage firms display more tax-loss selling behavior, suggesting that tax counseling plays a role.