An Empirical Study of Stock Market Anomalies


The market efficiency theory says that only a weak form of efficiency and to some extent, semi-strong form of efficiency show abnormality at some particular time periods. However, previous studies have shown very mixed evidence of stock market anomalies in terms of its size, type and economy; and some anomalies like January Effect, Friday the 13th, Turn of the Year Effect, Turn of the Month Effect, etc. are often found in developed markets too. Taking advantage of such abnormalities is very important for an investor in a stock market. The paper investigates the seasonal behaviour of daily stock return series of S&P CNX Nifty 500, Dow Jones and Shanghai Stock Exchange.


The existence of seasonality in stock returns violates the Efficient Market Hypothesis (EMH) in finance. EMH proposes that it is impossible to outperform the market through market timing or stock selection and suggests that all securities are priced efficiently to fully reflect all the information of the intrinsic value of stocks. However, in the context of financial markets and in the case of the equity market, several seasonal effects that create higher or lower returns depending on the time period have been noted. They are called ‘anomalies’ in literature as they are not explained by traditional asset pricing models. Studies on anomalies reveal that systematic violations of security market efficiency occurs in the equity market due to timing, reaction by investors to information, cash flows, policy decisions, certain macroeconomic events, etc. Such occurrence results in significantly different risk- adjusted returns than those expected. Therefore, if one is able to take advantage of such anomalies, one can earn superior returns (Zeimba and Hensel, 1994). Anomalies can occur with individual securities or with the market as a whole. As it is difficult to study the behaviour of abnormal returns of different securities, major studies in the area of seasonal anomalies are on indices. Even if some anomalies are controversial, difficult to measure and time varying, their studies are challenging and interesting, and provide interesting inputs for portfolio management. Rather than individual securities, indices are a good place to study anomalies. This is because 1. Reasonably long term data is available, and 2. It does not occur due to transaction costs or market failure (Boynton Wentworth, 2006). In the late seventies and eighties, many studies in the capital market provided enough evidence about the futility of information in consistently generating abnormal returns. More specific to these, studies carried out later have identified certain anomalies such as turn of the year, turn of the month, Friday the 13th, holiday effect, January effect, day of the week effect, etc. in both developed and emerging markets (Sarma, 2004).

This paper is organized as follows. Section I introduces about EMH and Anomalies in brief. Section II named Literature Review discusses results of the previous studies. Section III discusses concepts and types of anomalies, rationale for the study, objectives and variables considered for the study. Under the heading Empirical Model in Section IV, various tools to study anomalies and hypotheses are described. Section V and VI show the procedure to test the anomalies for three different markets, results of the same and conclusion. Further, in Section V named empirical results, all four anomalies are presented one by one under Sections A, B, C and D. Under each section, analysis of S&P CNX Nifty 500 is carried out and is followed by Dow Jones and Shanghai Stock Exchange. Finally, Sections VII and VIII present limitations of the present study, future work and managerial implications. The Appendix given at the end of the paper shows further bifurcated results of all four anomalies.

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