The phenomena of calendar effects in stock markets seem to be a center of curiosity for many researchers across the world. Following many studies about the significance of calendar anomalies, testing the presence of Monday effect and January effect appears to be an area of interest. The aim of this study is to discuss about calendar anomalies and its significance. It should be noted that the study will focus mainly on Monday effect and January effect on the stock returns of companies listed on SEM-7. The research proposal will consist mainly of the literature review part and the methodology part.
2.1DEFINITON OF BASIC CONCEPTS
Calendar anomalies are effects which include apparently different behavior of stock markets on different days of the week, month and year. Calendar effect may also be defined as a collection of theories that state that certain days or month are subject to above price changes in stock market and can therefore represent good or bad times to invest. Brooks and Persand (2001) defined calendar effects as the tendency of stock returns “to display systematic patterns at certain times of the day, week, month or year ”.
As mentioned above, the study will discuss mainly on Monday effect and January effect.
The day of the week effect also called Monday effect indicates that the average daily return of the market is not the same for all days of the week as we would expect on basis of Efficient Market theory. Monday effect is a theory which states that return of the last trading day is the highest and return on the first trading day is the lowest across the days of the week. January effect is a phenomenon whereby stocks claim higher rates of returns during January compared to any other month.
Smaller stocks tend to beat bigger stocks during this period. The January effect also known as “year-end effect” indicates rise in price during the period starting on the last day of December and ending on the fifth trading day of January .
The Stock Exchange of Mauritius was incorporated in Mauritius on March 30, 1989 as a private limited company responsible for the operation and promotion of an efficient and regulated securities market in Mauritius. The SEM operates two markets namely the official market and the Development & Enterprise Market (DEM). The study will focus only on the official market. On 31 March 1998, the Stock Exchange of Mauritius launched the index SEM-7, comprising companies listed on its official market. The SEM-7 comprises the seven largest qualified companies of the official market measured in terms of market capitalization, liquidity and investibility criteria. Therefore, the study will be based on the 7 companies in the SEM-7.
2.2Theoretical Explanation on Calendar effects
EFFICIENT MARKET THEORY
The growing number of studies proving the significance of calendar anomalies has led to doubts on “Efficient Market Hypothesis”. According to Fama (1970), “a capital market is efficient if all the information set is fully reflected in securities prices”. Efficient market hypothesis is one of the theories which states that, in whichever form, all the information is completely integrated in the share prices and therefore no one can beat the market. There are three form of market efficiency; weak form, semi-strong form and strong form based on set of information.
The weak form efficiency states that no one can outperform the market based on past information while in the semi-strong form, despite using public information, the market cannot be beaten. The strong form efficiency states that no one can beat the market despite using past, public and private information. As a result, according to the efficient market theory, the calendar anomalies have no effect on the share prices and that no one can use this anomaly to gain abnormal returns.
As already mentioned above, Monday effect, also known as weekend effect, is a theory according to which returns on Monday is less than the other trading days. Two hypotheses that have been formulated to explain Monday effect are Calendar Time Hypothesis and Trading Time Hypothesis.
According to the Calendar Time Hypothesis, Monday’s average return will be different from the other days’ average returns. A reason for this difference is that Monday’s average return will be three times higher than the average returns of the other working days. According to Trading Time Hypothesis, the returns on stock are generated during a transaction. This indicates that average returns will be the same for all weekdays including Monday. JANUARY EFFECT
January effect occurs when there is a general rise in stock prices during the month of January. January effect is also known as small firm in January effect because it is most frequently observed in small cap stocks . The nature of this anomaly suggests that the market is not efficient as market efficiency would suggest that this effect would disappear. The theories which explain January effect are:
•Tax-Loss Selling Hypothesis
This hypothesis was first suggested by Branch (1997) . In order to reduce tax liabilities, investors sell their loser stocks in December and create capital losses which they offset with the capital gain. Due to excessive selling of shares in December, stock prices are decreased and then investors purchase it again in early January which forces stock prices to rise. However, it is noteworthy of the fact that since in Mauritius, capital gains is not liable for tax purposes, this hypothesis cannot be used to explain January effect.
Some portfolio managers also do window dressing to their portfolio by creating January effect. Since they have to report their portfolio holding as at 31 December, they just sell riskier stocks before 31 December in order to make their portfolio look less risky on Annual Report. Later on, they just purchase the risky securities again in a view to earn high profits. •Information Release Hypothesis
According to this hypothesis, also known as differential information effect,
the excess January returns are the effect of significant information releases that occur in the first few days of January. This hypothesis relies on how discrepancy in the quantity of information available for different companies may result in different returns. According to Rozeff and Kinney (1976), distribution of year-end information may have a greater effect on the prices of small firms’ securities relative to large firms because the market for small firm stock is less efficient .
2.3Empirical evidences on Calendar effects
In order to investigate on the existence of calendar anomalies, there have been several studies conducted obtaining different results. In a recent paper by Haug and Hirshcey (2005) on January effect, evidence is found that the anomaly is significant for small cap stocks and continues to be consistent over time . Moreover, Fountas and Segredakis (2002) investigate about the significance of the monthly seasonality in the Amman Stock Exchange and find very significant January effects in this market.