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Capitalizing on Seasonalities in the Singapore Straits Times Index

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Capitalizing on Seasonalities in the Singapore Straits Times Index J ÖNKÖPING I NTERNATIONAL B USINESS S CHOOL JÖNKÖPING UNIVERSITY Capitalizing on seasonalities in the Singapore Straits Times Index Bachelor Thesis in Business Administration Authors: Joakim Hellman Oscar Hetting Maryam Tarighi Tutors: Johan Eklund Andreas Högberg Jönköping May 2012 Bachelor Thesis in Business Administration Title: Capitalizing on seasonalities in the Singapore Straits Times Index Authors: Joakim Hellman, Oscar Hetting, Maryam Tarighi Tutors: Johan Eklund, Andreas Högberg Date: 2012-05-18 Subject terms: Finance, behavioural finance, efficient markets hypothesis, EMH, seasonal anomalies, calendar effects, day-of-the-week effects, month-of-the-year effects, Straits Times Index, STI, abnormal re- turns ______________________________________________________________________ Abstract Purpose: The purpose of this thesis is to study the possible existence of day-of-the-week effects and month-of-the-year effects in the Sin- gapore stock market over the period January 1st 1993 to Decem- ber 31st 2011. The findings are analysed with the intention of de- veloping investment strategies and to investigate if behavioural finance can help to explain the existence of seasonal anomalies. Background: A number of previous studies have found evidence of seasonal anomalies in global stock markets, and by challenging the core assumptions of market efficiency, such anomalies may make it possible to predict the movement of stock prices at certain periods during the year. Consequently, there may be substantial profit- making opportunities that clever investors can benefit from, rais- ing two important questions: (1) can such anomalies be strategi- cally used to outperform the market and (2) why do such cyclical return patterns exist? Method: Daily closing prices from the Singapore Straits Times Index (STI) are used to compute average daily and monthly returns, which are further analysed through the use of statistical significance analysis and hypothesis testing to identify the possible existence of day-of- the-week effects and month-of-the-year effects in the Singapore stock market. The results of the statistical investigation are used to develop investment strategies that are designed to take ad- vantage of both positive and negative effects, and the theories of behavioural finance are applied to help explain why seasonalities occur at certain points in time. Conclusion: This study finds evidence of several seasonal anomalies in the Singapore stock market. Both day-of-the-week effects and month- of-the-year effects are present in the STI over the full sample pe- riod. Many of these effects can be explained by behavioural fi- nance, and used to develop investment strategies that outperform the market. i Acknowledgements This study has benefited from the contributions of a number of individuals, and the au- thors would like to express their gratitude and appreciation to everyone that have con- tributed with help and support in developing this bachelor thesis. In particular, we would like to extend our sincere thanks to Johan Eklund and Andreas Högberg for their guidance and encouragement throughout the writing process. Joakim Hellman, Oscar Hetting & Maryam Tarighi ii Table of Contents 1 Introduction ........................................................................................... 1 2 Theoretical background ....................................................................... 4 2.1 The Singapore Exchange .................................................................................... 4 2.2 The Straits Times Index ...................................................................................... 5 2.3 Price development of the Straits Times Index 1993-2011 ................................. 5 2.4 Seasonal anomalies ............................................................................................. 6 2.4.1 Day-of-the-week effects ..................................................................................... 7 2.4.2 Month-of-the-year effects ................................................................................... 7 2.5 Mainstream finance theory ................................................................................. 8 2.6 Behavioural finance .......................................................................................... 10 2.7 The link between behavioural finance and seasonal anomalies ....................... 12 2.8 Review of previous studies on seasonal anomalies .......................................... 13 2.8.1 Day-of-the-week effects ................................................................................... 13 2.8.2 Month-of-the-year effects ................................................................................. 18 3 Method ................................................................................................. 22 3.1 Delimitation and selection ................................................................................ 22 3.2 Data collection .................................................................................................. 23 3.3 Empirical method ............................................................................................. 23 3.3.1 Computation of returns ..................................................................................... 24 3.3.2 Null and alternative hypotheses ........................................................................ 24 3.3.3 Significance level and significance analysis .................................................... 25 3.3.4 Calendar strategies ............................................................................................ 27 3.4 Limitations ........................................................................................................ 27 4 Empirical findings and analysis ......................................................... 29 4.1 Investigation of day-of-the-week-effects 1993-2011 ....................................... 29 4.1.1 Day-of-the-week effects 2006-2011 ................................................................. 30 4.1.2 Day-of-the-week effects 2000-2005 ................................................................. 30 4.1.3 Day-of-the-week effects 1993-1999 ................................................................. 31 4.1.4 Summarizing analysis: day-of-the-week effects 1993-2011 ............................ 31 4.2 Investigation of month-of-the-year effects 1993-2011 ..................................... 32 4.2.1 Month-of-the-year effects2006-2011 ............................................................... 33 4.2.2 Month-of-the-year effects 2000-2005 .............................................................. 34 4.2.3 Month-of-the-year effects 1993-1999 .............................................................. 35 4.2.4 Summarizing analysis: month-of-the-year effects 1993-2011 ......................... 35 4.3 Development of investment strategies .............................................................. 38 4.3.1 The day-of-the-week strategy ........................................................................... 38 4.3.2 The month-of-the-year strategy ........................................................................ 40 4.3.3 Risk and return comparison of investment strategies ....................................... 43 5 Conclusions .......................................................................................... 46 6 Suggestions for further research ....................................................... 48 References ...................................................................................................... Appendices Appendix 1 STI constituents and sector classifications Appendix 2 Investment strategies iii List of figures and tables Figure 2.1 SGX market capitalization 1999-2012 ........................................................... 4 Figure 2.2 The Straits Times Index 1993-2011 ............................................................... 5 Figure 4.1 Average daily returns ................................................................................... 29 Figure 4.2 Average monthly returns .............................................................................. 32 Figure 4.3 The day-of-the-week strategy ....................................................................... 39 Figure 4.4 The month-of-the-year strategy .................................................................... 40 Figure 4.5 Comparison: STI vs. The day-of-the-week strategy ..................................... 42 Figure 4.6 Comparison: STI vs. The month-of-the-year strategy .................................. 43 Table 2.1 Review of previous studies: day-of-the-week effects ................................... 17 Table 2.2 Review of previous studies: month-of-the-year effects ................................ 21 Table 4.1 Day-of-the-week effects 1993-2011 .............................................................. 30 Table 4.2 Day-of-the-week effects 2006-2011 .............................................................. 30 Table 4.3 Day-of-the-week effects 2000-2005 .............................................................. 31 Table 4.4 Day-of-the-week effects 1993-1999 .............................................................. 31 Table 4.5 Month-of-the-year effects 1993-2011 ............................................................ 33 Table 4.6 Month-of-the-year effects 2006-2011 ............................................................ 34 Table 4.7 Month-of-the-year
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