TAX-INDUCED TRADING AND THE TURN-OF-THE-YEAR ANOMALY - AN INTRADAY STUDY

This study tests the tax-induced trading hypothesis as an explanation of the turn-of-the-year anomaly using Canadian and U.S. intraday data. Since the Canadian tax year-end precedes the calendar year-end by fiv e business days, tax effects may be isolated. We find the anomaly is r elated to the degree of seller- and buyer-initiated trading and depend s upon the incidence of the taxation year-end. Seller-initiated transa ctions (at bid prices) dominate until the tax year-end after which buy er-initiated trades (at ask prices) dominate. The anomaly is a functio n of bid-ask prices.