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An Analysis of Stock Market Anomalies and Momentum Strategies on the Stock Exchange of Mauritius

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An Analysis of Stock Market Anomalies and Momentum Strategies on the Stock Exchange of Mauritius An Analysis of Stock Market Anomalies and Momentum Strategies on the Stock Exchange of Mauritius By S.K. Bundoo University of Mauritius, Mauritius AERC Research Paper 227 African Economic Research Consortium, Nairobi January 2011 THIS RESEARCH STUDY was supported by a grant from the African Economic Research Consortium. The findings, opinions and recommendations are those of the author, however, and do not necessarily reflect the views of the Consortium, its indi- vidual members or the AERC Secretariat. Published by: The African Economic Research Consortium P.O. Box 62882 - City Square Nairobi 00200, Kenya Printed by: Modern Lithographic (K) Ltd. PO Box 52810 – City Square Nairobi 00200, Kenya ISBN 9966-778-99-3 © 2011, African Economic Research Consortium. iii Contents List of tables iv Abstract v Acknowledgements vi 1. Introduction 1 2. Literature review 3 3. Data collection and methodology 14 4. Analysis of results 18 5. Conclusion 34 References 36 iv List of tables 1. Stock Exchange of Mauritius: Market highlights 2 2. Daily mean and standard deviation of return for market index 18 3. Day-of-the-week effect at company level and for the market 19 4. Measuring the economic significance of the daily effect 21 5. Investigating the January effect at company and market level 22 6. Daily market return by month 23 7. Investigating month-of-the-year effect on the SEM 23 8. Investigating month-of-the-year effect 24 9. Measuring economic significance of the month-of-the-year effect 24 10. Results for the Fama and French three-factor model on the stock exchange of Mauritius 25 11A. Investigating day-of-the-week effect at portfolio level 26 11B. Investigating day-of-the-week effect at portfolio level 26 12. Investigating month-of-the-year effect at portfolio level 27 13. Mean excess returns for momentum portfolios sorted on return only 28 14. Mean excess returns on momentum portfolios sorted by size and book equity to market equity 28 15. Momentum portfolios sorted by return only regressed on the Fama and French factors 30 16. Testing momentum effects on the stock exchange of Mauritius using the Carhart model 30 17. Investigating momentum effects on the SEM in low book equity to market equity portfolios 31 18. Investigating momentum effects on the SEM in high book equity to market equity portfolios 31 19. Investigating momentum effects on the SEM in small market cap portfolios 31 20. Investigating momentum effects on the SEM in big market cap portfolios 32 21. Excess mean return by month for the momentum portfolios 33 v Abstract The Stock Exchange of Mauritius started operations in July 1989 and as at December 2006 there were 41 listed companies with a market capitalization of US$3,540.60 million. The market index is the Semdex. This study investigates whether the stock market anomalies such as day-of-the-week effect and the January effect are present on the Stock Exchange of Mauritius over the period January 2004 to December 2006. We find negative Tuesday returns but positive returns for other days of the week. However, when we control for the size effect and the value premium as per the Fama and French (1993) three-factor model, only the Friday effect remains significant. The possible profit opportunities on the SEM in terms of both economic and statistical significance are also investigated. Finally, the study investigated investment strategies based on momentum in returns on the Stock Exchange of Mauritius and how robust these strategies are after controlling for size and value. The mean excess returns are statistically significant at the 1% level for momentum portfolios. We also find strong support for the Carhart’s (1997) model where the momentum factor is priced. The explanatory power of the momentum factor in fact dominates that of size and value. Key words: Stock market anomalies, momentum, Stock Exchange of Mauritius. vi Acknowledgements I thank the African Economic Research Consortium (AERC) for providing the financial assistance for conducting the study. I would also like to thank all the resource persons in Group C and reviewers for all their guidance and valuable comments on earlier drafts of the paper. Finally, I would like to acknowledge the support of the University of Mauritius in providing the necessary leave in order to attend the workshops. AN ANALYSIS OF STOCK MARKET ANOMALIES AND MOMENTUM STRATEGIES ON THE STOCK EXCHANGE 1 1. Introduction he Stock Exchange of Mauritius (SEM) started operations in July 1989. It is composed of an Official Market and a Development and Enterprise Market T[formerly the Over The Counter market (OTC)]. The trading activity of the exchange is administered by the Stock Exchange of Mauritius (SEM) Limited. The regulatory body is the Financial Services Commission (FSC). On the Official Market, the number of listed companies (equities) grew from six in December 1989 to 41 in December 2006, and the market capitalization increased from around US$93.26 million to US$3,540.60 million over the same period. Table 1 gives summary statistics on the market. The listed companies are classified into seven broad categories, namely banking, insurance and other finance, industry, investment companies, sugar, commerce, leisure and hotels, and transport. Banking, insurance and other finance, leisure and hotels and commerce account for around 60% of the total market capitalization. The development of the infrastructure and improvement in the services offered by the exchange are crucial to boost the operational efficiency of the market, to mitigate the problem of liquidity and to attract both local and foreign investors. Major improvements in trading infrastructure are: • A Central Depository and Settlement (CDS) system, a computerized system to speed up clearing and settlement, has been operational since November 1997. Transfer and settlement operations are carried out in a maximum of three days. It has also been linked to an automated clearing and settlement system, the Stock Exchange of Mauritius Automated Trading System (the SEMATS). The SEMATS was launched on 29 June 2001 to replace the traditional trading pattern (open-outcry trading floors). • Initially, trading was twice a week, which was increased to three times a week in January 1994. However, with a view to improving market liquidity, as from 24 November 1997, the exchange trades daily on the official market. This has been possible with the coming into operation of the CDS. • The SEM has also opened a website, allowing access to market information. Listing Rules were revised in February 2000. A new Securities Act 2005 was also introduced. Since August 1994, with the suspension of the Exchange Control Act, foreigners can buy shares on the local market, provided they do not acquire a controlling stake. Foreign portfolio flows have been accounting for at least 30% of total turnover over the past few years. The Semdex, a value-weighted index, is the index of all listed ordinary shares. There are 11 stockbroking companies in operation. Trading on the exchange is done by an order-driven system. The brokerage fee claimed by stockbroking companies varies from 0.50% to 0.75%. Table 1: Stock Exchange of Mauritius: Market1 highlights 2 RESEARCH PAPER 227 1989 1991 1994 1997 1999 2001 2004 2006 No. of listed 6 19 34 42 43 40 40 41 companies (equities) Mkt Cap (Rs billion)1 1.44 4.86 28.54 36.93 41.73 32.15 67.03 116.98 Mkt Cap ($)2 93.26 309.52 1,578.32 1,754.63 1,643.31 1,601.85 2,395.78 3,540.60 Turnover ratio (%) 0.97 1.67 5.45 8.11 4.74 10.24 4.21 5.12 SEMDEX 117.34 154.17 476.1 391.12 435.69 340.92 710.77 1,204.46 P/E ratio 6.56 6.12 20.11 12.86 8.98 5.91 9.93 11.95 Div yield (%) 5.42 5.11 2.08 3.62 5.03 8.30 4.84 3.66 1. Mkt cap stands for market capitalization 2. Market capitalization in million US dollars Source: SEM Factbooks, various issues and author’s computations. We observe from Table 1 that there has been a consistent growth in the market index and hence in the market capitalization. However, the number of listed companies has not increased significantly since 1997 and the market is still characterized by low liquidity levels as confirmed by the turnover ratio. This study contributes to the existing literature in several ways. First, it analyses stock market anomalies within an asset pricing model framework and in an emerging African stock market context. Second, the research will be valuable to fund managers, portfolio managers, arbitrageurs and the investing public at large. It must be stressed that this research is targeted mainly at practitioners/investors who are trading on the market; it demonstrates how the results can be useful to them in adjusting their trading strategies. If there are seasonal and other anomalies, can they profit from them? In a stock market with an annual turnover of around US$349 million; it is important to see whether there are certain patterns which can be exploited by investors. It will also provide valuable insights for market participants, regulators and policy makers. The study will also investigate investment strategies based on momentum in returns on the Stock Exchange of Mauritius. Objectives of the study The study: • Tests whether stock market anomalies such as day of the week effect and the January effect are present on the SEM, particularly when controlling for systematic risk. • Investigates whether the calendar anomalies persist when the size effect and the value premium, as per the Fama and French (1993) three-factor model, are controlled for.
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