Seasonal variation in risk and return trade-off

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.