Seasonal variation in risk and return trade-off

Abstract

Existing studies show that firms with large macroeconomic risk do not earn higher returns, incompatible with the theoretical predictions of standard economic models. Using a broad set of macro-related factors, we find the January seasonality of the macroeconomic risk-return relation. Firms with high macro risk deliver higher returns than firms with low risk in January, that is, the positive risk-return trade-off holds. Conversely, the negative risk-return relation is observed in non-January months. The seasonal variation in the macro risk-return relation cannot be explained by existing January effects, including the tax-loss selling, window dressing, and pronounced gambling preference around New Year.