Firm size and the day of the week effect on the Johannesburg Stock Exchange.
Loading...
Date
2020
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract
The Efficient Market Hypothesis (EMH) asserts that stock prices always entirely reflect all
available information and that stock prices follow a random walk, where future stock prices
are not predictable based on historical prices (implying stock market efficiency). If the stock
market is not efficient, abnormal returns can be realised by beating the stock market through
observing and trading on certain patterns (anomalies) exhibited by past stock prices. Various
anomalies have been documented, including the Day of the Week (DOW) effect (the tendency
of a stock market to exhibit on average low daily returns in the beginning of the week (mostly
on Mondays) and high returns towards the end of the week (mostly on Fridays). Examining the
DOW effect is particularly interesting, as it demonstrates daily patterns on which investors can
take advantage of this anomaly to realise excess returns on daily basis. One of the reasons that
has been put forward as to what initiates the DOW effect, is measurement error as when a
variable of interest either explanatory or dependent variable has some measurement error independent of its value. Thereby, leading to the notion that the DOW effect is present in medium
and small markets or firms with low merchantability (firm size effect). However, from the
South African literature, still has a gap about the existence of the DOW effect across firm sizes
on the JSE and its cyclical (appearing or disappearing) changes over time.
Firstly, the study examined the existence of the DOW effect on the JSE in firm sizes on a full
sample (1995 to 2019) utilising daily log-returns. The best-fit models were selected from a
family of GARCH models, EGARCH (2, 1) and EGARCH (3, 1) models better fitted the AltX
and the large index respectively and TGARCH (3, 1) and TGARCH (1, 1) better fitted medium
and small indices respectively. The results showed that the DOW effect exists on the JSE stock
exchange in three out of all the four investigated indices (medium, small and AltX except the
large), particularly the DOW effect existed more in returns than in the volatility of those returns. Secondly, a rolling window analysis was utilised to examine the changes of the DOW
effect over 1995- 2019 where the best-fit model for each sub-period was utilised. The results
showed that the existence of the DOW effect is not constant over time concluding a cyclical
behaviour (appearing and disappearing in some sub-periods). However, the highest frequency
of appearance of the DOW effect appeared in the medium, small and the AltX indices confirming the notion that the DOW anomaly is mostly found in companies with low capitalisation.
Description
Masters Degree. University of KwaZulu-Natal, Durban.