Day-of-the-Week and Month-of-the-Year Effect on the Kenyan Stock Market Returns

Abstract

Capital markets are normally assumed to be efficient in relation to the
instantaneous incorporation of all known and new arriving information
into prices of securities. Studies assessing the efficiency of capital
markets have reported mixed results, some of which are against the
efficient markets theory. The purpose of this study was to determine if
daily and monthly seasonal anomalies do exist in the Kenyan stock
market. Data on prices and adjusted returns derived from the NSE 20
index were analysed using regression analysis to identify the behaviour
of stock investors in Kenya during 1980-2006. Results indicate that
Monday produces the lowest negative returns, while Friday and January
produce the largest positive returns. These results are useful in
providing evidence of deviation from the efficient markets theory and in
drawing conclusions about anomalies in an emerging stock market.
Finding highest return volatility on Friday and lowest on Monday might
be due to several economic news announcements released on Thursdays
and Fridays, and is consistent with informed trader argument. The
returns are therefore influenced by foreign portfolio investor behaviour
and delays in receiving news released from foreign financial markets.
Day-of-the-week effect and January effect patterns in return and
volatility might enable investors to take advantage of relatively regular
shifts in the market by designing trading strategies, which accounts for
such predictable patterns.