A large body of empirical research has found that stock returns tend to be higher in January than in other months. One possible explanation is that there is seasonality in the risk-return structure. We examine the risk-return relationship for the UK equity market. We use monthly sectorial data to estimate a dynamic version of the APT that explicitly allows for a different conditional factor structure in January from the rest of the year. While we confirm the US finding that the risk-return relationship is different in January, our results depart from the existing literature in two ways. First, we find a consistently positive and statistically significant relationship between non-diversifiable risk and return in non-January months. Second, we find some evidence against the APT restrictions on our model in January, in that the prices of January risk may not be common across assets.
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