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ERASMUS UNIVERSITY ROTTERDAM Erasmus School of Economics ERASMUS UNIVERSITY ROTTERDAM Erasmus School of Economics Bachelor’s Thesis (International Bachelor Economics and Business Economics): Calendar anomalies and their prevalence across years and markets Student Name: Joshua Albert-Smith Student ID Number: 428728 Supervisor: Dr. Esad Smajlbegovic Second Assessor: Dr. Stefan Obernberger Date Final Version: 19 August, 2018 Abstract This paper examines the presence of calendar anomalies during the period of 1990-2018 and across developed, emerging and frontier markets. The anomalies examined are the Day of the Week effect, the Monday effect, the Twist on the Monday effect and the Halloween effect. The results of this paper show that both the Monday effect and the Twist on the Monday effect are still prominent across markets and periods while there is a lack of evidence for the existence of the Day of the Week effect and the Halloween effect. 2 Table of Contents 1. Introduction ..................................................................................................................... 4 2. Literature Review ............................................................................................................. 6 3. Data .................................................................................................................................. 8 4. Methodology ................................................................................................................... 12 4.1 Day of the Week Effect ........................................................................................................ 12 4.2 Monday Effect...................................................................................................................... 13 4.3 Twist on the Monday Effect ................................................................................................ 14 4.4 Halloween Effect .................................................................................................................. 15 5. Results ............................................................................................................................ 16 5.1 Day of the Week Effect ........................................................................................................ 16 5.2 Monday Effect...................................................................................................................... 17 5.3 Twist on the Monday Effect ................................................................................................ 18 5.4 Halloween Effect .................................................................................................................. 19 5.5 Risk an as Explanatory Factor for Anomalous Returns..................................................... 20 5.6 Trading Strategies ............................................................................................................... 22 6. Conclusion ..................................................................................................................... 23 Bibliography ....................................................................................................................... 25 Appendix ............................................................................................................................ 27 3 1. Introduction Market anomalies can be defined as distortions in security prices such that their rates of return differ significantly from the average. More specifically, calendar effect market anomalies are characterised by their presence being related to certain calendar events or dates. While these anomalies have been studied and identified before, no prior research compares their prevalence between economies in different stages of development. These effects seem to continually captivate the attention of those in the financial sector, with news articles frequently citing these effects along with a discussion of the Efficient Market Hypothesis. The common theme of these articles is that anomalies represent an easy way to exploit the market. An article which appeared in the Financial Times (Harford, 2012) states that “researchers keep discovering predictable patterns in the data, and such patterns amount to big piles of money being left on the sidewalk”. These effects have also been discussed in The Wall Street Journal with one article (Hulbert, 2013) even being entitled “How to Play the Halloween Indicator”. The central question that this paper addresses is the extent to which these calendar effect market anomalies are present in economies in different stages of development. The calendar effects this paper analyses are the Day of the Week effect, the Monday effect (also called the Weekend effect), the Twist on the Monday effect and the Sell in May effect while the economies studied will fall into the category of developed markets, emerging markets or frontier markets. These effects are chosen as they represent some of the first calendar anomalies discovered and the anomalies which have been the most broadly researched, even when this research produces conflicting results. This paper adds to previous research with the use of a more recent dataset of returns data. Furthermore, the prevalence of anomalies in markets at different stages of development is analysed. To understand the analysis performed in this paper it is important to understand what is suggested by each of the effects. The Day of the Week effect posits that average stock returns differ according to the day of the week. A more specific effect, the Monday effect suggests that stock returns on a Monday are on average lower than those on all other days. The conditions for the Monday effect are extended by the Twist on the Monday effect which states that the return for stocks on a Monday is on average negative if the stock market has declined in the previous week. The Halloween effect follows the saying ‘sell in May and go away’. Namely, the highest returns in a year are exhibited in the months from November to April with May marking the beginning of a period of weaker stock returns. In addition to the individual effects, analysis is performed according to countries with markets in different stages of development, namely developed markets, emerging markets and frontier markets. Developed market countries include those in the Group of 7 (G7) – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America. BRICS nations are taken as a representative sample of emerging markets (Brazil, Russia, India, China and South Africa) while the five most developed economies in frontier markets are used as a sample for those (Argentina, Kuwait, Vietnam, Morocco and Nigeria). These calendar anomalies have been documented and studied in previous research. French (1980) coined the term Weekend Effect in his seminal paper while the Twist on the 4 Monday effect is first analysed by Jaffe, Westerfield and Ma (1989). An additional study by Gibbons and Hess (1981) finds that stock returns are not identically distributed across the days of the week in support of the Day of the Week effect. Finally, anomalies that span months are investigated when Bouman and Jacobsen (2002) Investigate the Halloween Effect. The papers discussed above are some of the most significant papers pertaining to calendar anomalies and each effect. A more comprehensive analysis follows in the literature review, however, it should be noted that no papers currently investigate such a broad spectrum of effects across different types of markets. This paper investigates the extent to which these anomalies are present in the aforementioned markets. In addition, the paper examines whether the anomalies become more or less prevalent over different time periods. This paper contributes to current literature by analysing calendar effects across a wide array of markets in different stages of development to determine whether these effects may be more pronounced in certain types of markets. Furthermore this paper utilises data from a more recent time period (1990 – 2018) than that which has previously been utilised. Results of the analysis performed in this paper indicate that the Day of the Week effect and the Halloween effect are not present across any market or period in the dataset which is used, however, significant evidence is found in favour of the existence of the Monday effect and the Twist on the Monday effect. Despite this, there is no discernible pattern for the effects being more or less pronounced across different markets or periods and in certain instances there is evidence of a reversal of the effects. The results of this study are relevant for both academia and industry. Within the academic world the Efficient Market Hypothesis states that asset prices fully reflect all available information (Fama, 1998). If anomalies are found to exist, this would form the basis for the rejection of the Efficient Market Hypothesis. An extension of the hypothesis is that it is not possible to outperform the market. This leads on to industry relevance, whereby investment strategies may be formulated in accordance with anomalies in order to outperform the market. This paper proceeds with a review of current literature pertaining to calendar anomalies. Subsequently the data which is used is discussed along with descriptive statistics. Methodology details follow wherein models are defined and calculations are presented. This leads to the results and a discussion of their implications. Finally a conclusion is presented
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