Information Uncertainty Risk And Seasonality In International Stock Returns

A parsimonious two-factor model containing the market risk factor and a risk factor related to earnings information uncertainty has been developed in order to explain the seasonal regularity of January in international stock markets. This two-factor model shows apparently stronger power in explaining time-series behavior of stock returns and the cross-section of average stock returns in all major developed countries than do the competing models. Furthermore, the arbitrage residual return in January, which is the difference in the average residual returns between the smallest and the largest size portfolios, is statistically insignificant in all the countries.