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The clientele effect around the turn of the year: evidence from the bond markets

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  • Vladimir Kotomin

    (Illinois State University)

Abstract

Studying the returns of US Treasury, corporate, and municipal (muni) bonds at the index level over 2004-2020, I find a strong turn-of-the-year effect – low December returns and high January returns – in the high-yield muni index. The investment-grade muni index exhibits a similar but weaker effect. High-yield munis is the only class whose December returns are negatively correlated with year-to-date yield changes. Dominance of highly tax-sensitive households who engage in tax-loss selling, combined with opaqueness, low liquidity, and a small role of ETFs in munis make it difficult to arbitrage away the December price decreases. The investment-grade and high-yield corporate bond indices have abnormally high December returns in years with capital losses. The high-yield corporate index also has abnormally high December returns even in years without capital losses. It represents a change from the findings of prior research and suggests that corporate bond investors exhibit contrarian tendencies in December.

Suggested Citation

  • Vladimir Kotomin, 2021. "The clientele effect around the turn of the year: evidence from the bond markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(4), pages 637-653, October.
    • Handle: RePEc:spr:jecfin:v:45:y:2021:i:4:d:10.1007_s12197-021-09550-y
    DOI: 10.1007/s12197-021-09550-y
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    More about this item

    Keywords

    Clientele effect; Turn-of-the-year effect; Tax-loss selling Municipal bonds; Mutual fund flows;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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