http://clevelandfed.org/research/workpaper
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ABSTRACT
Errors in recorded security prices are a source of misspecification in the
market model. If recorded-price errors are sufficiently nonrandom, they
result in biased returns and biased and inconsistent estimates of market model
regression coefficients. This paper argues that tax-induced flow-supply pres-
sures result in end-of-the-year recorded-price errors that are nonrandom
enough to cause the appearance of anomalous turn-of-the-year stock return
behavior. Empirical tests of returns and market model regression coefficients
during the turn-of-the-year period cannot reject this errors-in-variables
explanation of the turn-of-the-year effect.