Abstract
Adequate knowledge about the effect of days of the week on stock market dynamics remains vital and essential information to investors. These will guide not only investment decisions but also planning for economic growth and development. Given that the Nigerian Stock Exchange has existed, its ability to generate confidence is still in doubt given the recent crash witnessed in the market. It means the confidence the exchange is expected to instil in investors is still not commensurable. It was against the forgoing that this study examined the days of the week effect and stock market dynamics in Nigerian Stock market. The study adopted the Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) model and data were obtained from daily reports of the Nigerian Stock Exchange from 3rd January, 2011 to 31st December, 2015. The co-integration table indicated co-integration at 0.05 level which goes to shows that thereis a long run relationship between the days of the week and returns on NSE at 5% level of significance. The study also showed thatthere is a positive relationship between index returns on Tuesday, Wednesday, Thursday, Friday and Monday and the relationship is significant. The average return of NSE on every working day of the week is statistically significant.The mean return of each trading day is not significantly equal on at least one trading day and it has significantly mean difference.The recommendation is that Strategies need to be designed toward reaping abnormal returns by exploiting information and actions that enhance inefficiency in stock markets thus, firms and individuals should be encouraged to buy or sell securities outside their face values, as a means of encouraging business or economic activities in the economy.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
In recent years, the testing for market anomalies in stock returns has become an active field of research in empirical finance and has been receiving attention from not only in academic journals but also in the financial press (Maman-Watara, 2010). Among the more well-known anomalies are the size effect, the January effect and the day-of-the week effect. The day of the week effect is a phenomenon that constitutes a form of anomaly of the efficient capital markets theory (Maman-Watara, 2010). According to this phenomenon, the average daily return of the market is not the same for all days of the week, as we would expect on the basis of the efficient market theory (Berument and Kiymaz, 2003). The day-of –the-week effect continues to be one of the more interesting stock market anomalies to study because the existence of significant day-of-the-week effects would be very useful for developing profitable trading strategies. Investors could buy stocks on days with abnormally low returns and sell stocks on days with abnormally high returns.
The January Effect (also known as the turn-of-the-year effect or the January anomaly) was first observed in 1983 by Keim. He noted that the average risk-adjusted return for a portfolio of small firms’ stocks is large in January and much smaller for the rest of the year. The January effect is said to affect small caps more than mid or large caps (Anwar et al., 2009)
The day-of-the-week effect (also known as the weekend effect) refers to the tendency of stocks to exhibit relatively large returns on Fridays compared to those on Mondays. The studies on day-of-the-week effect have been on-going since 1930 when Kelly revealed the existence of a Monday effect on the US markets where the returns turned out to be negative (Chiaku, 2006). The day of the week patterns have been investigated extensively in different markets (Anwar et al., 2009; Chris and Gita, 2001). The average daily return of the market is not the same for each day of the week. The day of the week effect phenomenon resulted in a different return for each day of a week. This phenomenon of return can affect investors in deciding investment strategy, portfolio selection, and profit management.
Researchers that have also investigated whether these anomalies exist in developing market, particularly the Nigerian stock exchange includes; Umar (2013), Chipili (2012), Osazevbaru and Oboreh (2014), Oladayo (2015), Alagidele (2008), Ajibola (2014) etc. Due to volatility behaviour of the stock prices, majority of these researchers have investigated this daily anomaly using the non-linear model of either the generalized autoregressive conditional heteroskedasticity (GARCH) or the exponential generalized autoregressive conditional heteroskedasticity (EGARCH) model.
Fast growing numbers of researchers (Charles (2010), Saadi et. al (2006)) etc with empirical evidence have supported the argument that the day-of-the-week anomalies are nothing but a fiction, imagination and inadequate application of methodology. Saadi et al. (2006) noted that evidence of the day-of-the-week effect is not robust to a GARCH model with normal, student-t, GED or the double exponential error distribution. Because Nigerian Stock Exchange serves as the second largest financial centre in sub-Saharan Africa, the third largest stock exchange in Africa by capitalization and the largest market in West Africa. With this, most researchers have investigated the day-of-the-week in mean and/or volatility under different distributional assumptions (Umar, 2013).
The motivation for this work is based on the fact that Nigeria liberalised their financial markets in 1995 and as expected, it has provided opportunities for foreign investors to actively participate in these markets which in turn increases the level of liquidity, saving and growth of her economies. However, experience has shown particularly from the South East Asia that these huge potentials are often characterised by a high level of uncertainty or volatility as explained by Singh (1997), Stiglitz (2000), Allen and Gale (2000). This partly explains why researchers estimate the day of the week effect both in the mean and in variance equations. Evidence from stock daily returns clearly exhibit volatility clustering, which is high period is followed by low period volatility (Umar, 2013). It evolves over time in a continuous manner and it is asymmetric, responding to increasing and decreasing in prices.
The objective of this study is therefore to examine the day of the week effect both in the mean and variance equations for Nigerian equity market. The choice of Nigeria for this study is due to their important economic role in sub-Saharan Africa; they are the biggest economies in Sub-Saharan Africa. The Nigerian economy also has rich experiences in economic and financial sector reforms over the past two decades. The study will cover the post-liberalisation period due to lack of data for the pre-liberalisation period. The pre-liberalisation period is simply the period before the domestic markets open up to foreign investors while post-liberalisation is after the markets have become internationalised.
The purpose of this research is to present evidence on the day-of-the-week effects for the Stock Exchange of Nigeria by applying a prediction function to each day in a week and evaluating the percent of error.
1.2 Statement of the Problem
The state of African stock markets in totality brings forth questions about how the markets hold up in terms of the gaps in their functional and operational efficiencies. As arguments established by some studies Umar (2013), Chipili (2012), Osazevbaru and Oboreh (2014), Oladayo (2015), Alagidele (2008), Ajibola (2014) on Nigerian stock exchanges, a contentious case of informational inefficiency could be one besetting issue for the continent’s stock markets whereas question arising from flow of liquidity is another. These clearly spell out the difference between stock markets in Africa and those in the developed countries. It is however noteworthy that the disparity between the various renowned and developed stock markets and that of Africa signifies a challenge for the financial base of the continent. Attempts to up its efforts to reach the standards of such stock markets could be a case of clear-cut emulation of the Western markets which is of positive effects to the African stock market. Fast growing numbers of researchers (Charles (2010), Saadi et. al (2006)) etc with empirical evidence have supported the argument that the day-of-the-week anomalies are nothing but a fiction, imagination and inadequate application of methodology. Saadi noted that evidence of the day-of-the-week effect is not robust.
Nigerian Stock Exchange serves as the second largest financial centre in sub-Saharan Africa, the third largest stock exchange in Africa by capitalization and the largest market in West Africa. With this, most researchers have investigated the day-of-the-week in mean and/or volatility under different distributional assumptions. The purpose of this research is to present evidence on the day-of-the-week effects for the Stock Exchange of Nigeria by applying a prediction function to each day in a week and evaluating the percent of error
1.3 Research Questions
- Do weekday market anomalies exist at the NSE?
- Is the weekday anomaly effect persistent over times?
- Are there existing seasonality in the returns of NSE?
1.4 Objectives of the Study
The broad objective of the study is to investigate days of the week effect and stock market dynamics in Nigeria.
The specific objectives are:
- To examine days of the week effect in the returns of NSE,
- To investigate the weekend effect in NSE average returns and
- To explore the seasonality in returns of NSE.
1.5 Research Hypotheses
H01: The average return of NSE of every working day of the week is not statistically significant
H02: Mean returns of each trading day aresignificantly equal.
H03: At least one trading day has no significant different mean return.
1.6 Significance of the Study
This study intended to deal comprehensively with Day of the week effect and stock market dynamics in Nigeria. The findings of this study will be of great importance to the following:
Investors:The study looks at the various recurring anomalies that can be exploited by arbitragers to make abnormal profit. If investors specify a certain pattern in volatility, then it would be easier to make investment decisions based on both return and risk. This will give investors another tool to design profitable investment strategies.
The government and policy makers: The findings will be of help to the Nigerian government in its policy making decisions, factoring the anomalies in the securities market. Existence of anomalies is an alarming situation for policy makers as they should concentrate on the market situation and plan to control the anomalous behaviour
To economists: Knowledge of the properties of the daily exchange rate has important implications for economists. The effects of exchange rate movements on international trade and capital flows can be vital, especially for small open economies where foreign exchange variability could affect the economic performance significantly.
Research and Academicians: The pursuit of knowledge is a major human endeavour; information on market anomalies at Nigerian stock exchange will improve the existing academic body of knowledge. Exploration into an area of study helps scholars better understand the topic and questions related to that area of research.
1.7 Scope of Study
This study assesses the influence of day-of-the-week effects in returns and volatility using the Nigerian stock exchange (NSE-30). The data generated is limited to Nigeria stock exchange and cannot be generalized to other countries.
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