ABSTRACT
Market anomalies are something which are inconsistent with
the efficient market hypothesis (EMH). Anomalies are the ones which generate abnormal returns/profits to
the investor which are above the expected rate of return generated by the
efficient markets. Anomalies are considered when there is a trend in the
market. If an anomaly is known by everyone in the market then the advantage of
this anomaly is taken by every investor in the market and the abnormal profit
then scatters away and only normal profits are generated by the investors which
are then consistent with the efficient market hypothesis. An anomaly is first
found through data mining or data snooping through aggressive research by going
through its data of historical prices and volume movements and then causes for
such an anomaly are then researched. In this research paper of mine I am going
to take the nifty 50 index as my base subject then try to find different market
anomalies like turn of the month effect(January effect), weekend effect and turn
of the year effect. Nifty 50 index is a portfolio of securities of 50
diversified companies comprising 13 sectors. Nifty midcap 50 captures the
movement of the midcap segment of the market and Nifty smallcap 50 captures the
movement of the smallcap segment of the market.They are managed by the National
Stock Indices which is a subsidiary of NSE Strategic Corporation limited. It
was established on 21st April 1997. They are a free float market capitalization
weighted index in which market capitalization is found by market price
multiplied by number of outstanding shares in the market excluding the number
of shares held by the promoters of the company.
KEYWORDS :
Efficient Market Hypothesis (EMH), Market
Anomalies, Turn of the Year Effect (January), Turn of the Month Effect and
Weekend Effect.
INTRODUCTION
EFFICIENT MARKET HYPOTHESIS (EMH)
Efficient market
hypothesis (EMH) is a term coined by Harry Roberts (1967) which was developed
independently by Fama (1963,1965) and Samuelson (1965). Many other researchers
claim its origin in their research work but its due credit is given to Eugene
Fama. EMH states that current market price of the shares reflects all the
information available in the market, I.e., market participants have all the
information related to that company shares. Market participants can only earn
normal profits in the market only and passive investment strategy is favorable
to the investors. Passive investment strategy is that the investors are
following a certain benchmark (like index, shares, etc). In passive investment
strategy investors earn equal to their benchmark returns. Whereas in active
investment strategy investors use their own investment techniques or strategies
for investment and there is also high transaction costs associated with
investors buying or selling the assets in this strategy. In active investment
strategy investors try to earn above the benchmark. In EMH passive investment
strategy is followed and investors earn only equal to their benchmark or normal
profit rather than abnormal profits which the active investment strategy tries
to earn. EMH describes three types of market:- weak form efficient ,
semi-strong form efficient and strong form efficient.
MARKET ANOMALIES
Market anomalies arise when there are inefficiencies in the market as they should be because markets are formed by investors who are irrational and not only by the rational investors as theories state. The market is driven by people’s sentiments, biases and not just with the pure rational thought process. Due to anomalies individuals are able to earn abnormal profits than normal profits as stated in EMH. Prices of the stock are different than as predicted by the EMH prices .Anomalies can be of various types like turn of the year effect(January effect) , turn of the month effect, weekend effect, stock split effect etc. Causes of these anomalies can be because new information doesn’t quickly adjust , tax treatments are different, adjustments of cash flows and behavioral constraints of the investors. Anomalies are found after a long aggressive data snooping by viewing all the past data related to trading volumes and prices and if there is a pattern found, reasons for its occurrence are to be investigated as to why this is happening. By following such patterns investments are made so that abnormal profits can be made and an active investment strategy approach is taken in this. Volatility of the stock market also influences the inefficiencies in the stock market, more volatile the stock market more inefficiencies it have.
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TURN OF THE YEAR EFFECT (JANUARY)
Turn of the year effect states that there is a pattern of increased volume and higher price movement during the last week of December and first two weeks of January. The January effect is the same as of the turn of the year effect but it is stated that small cap company stocks outperforms the market during the first two or three weeks of January. It can be due to window dressing by companies.
TURN OF THE MONTH EFFECT
Turn of the month effect states that during the last four days of the month and starting three days of the next month there is an increase in trading volume and higher stock prices.
WEEKEND EFFECT
Weekend effect states that on Mondays stock prices tend to decrease and on Fridays stock prices tend to rise or increase. It can be attributed to bad news released by companies after the closing of the Market on Friday.
OBJECTIVE OF THE STUDY
In this study I wanted
to find out the following :
•
To find market anomalies in the Indian
stock market index Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50.
•
To Compare market anomalies between the
three indices : Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50.
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| Source: www.google.com |
METHODOLOGY
Daily data of stock closing prices has been collected from National Stock Exchange (NSE) for 12 years from 2010-2021 of all the three indices Nifty 50, Nifty midcap 50 and Nifty smallcap 50. Data is collected from secondary sources. Multiple linear regression with dummy variable is applied. 2978 observations are used for turn of the year effect (January) and weekend effect. For the turn of the month effect 2976 observations are used.
ANALYSIS
Stock returns are calculated by :
Rt
= ln(Pt/Pt-1) = ln(Pt) - ln(Pt-1)
Where Rt represents log return of closing stock price,
Pt represents the
closing stock price of the present day and Pt-1 represents the closing stock price of the previous day. Log
stock returns are chosen over linear returns because it is very easy to calculate
and they give a first order difference of logarithmic prices.
Dummy variable multiple
linear regression model is used for finding the market anomalies. Dummy
variables take only two values 1 and 0.
1 represents presence of an attribute and 0 represents absence of the
attribute. For the dummy variable model, if there are 'n' numbers of variables
then n-1 number of dummy variables should be used. One variable should be
omitted as it is represented by the intercept of the model. Total observations
for each market anomaly from 2010-2021 is 2978.
For finding the Turn of
the year effect (January effect) we have used :
Nifty
return = b0 + b1d1(January) + b2d2(April) + u
As financial year for many countries have different starting period ,i.e., for USA it is January to December and for India it is April to March so we have collected data concerning each financial year :
Nifty return = b0 + b1d1(January) + b2d2(April) + u
b0 = represents returns in other months other than January and April
b1 = coefficient which
represents return on January
d1(January) = dummy
variable used for indicating the presence of January or not
b2 = coefficient which
represents return on April
d2(April) = dummy
variable used for indicating the presence of April or not
For finding the turn of the month effect we have used a return interval of seven days which comprises first days of the current starting of the month and last four days of ending of previous month.
Nifty return = b0 + b1d1(TOM) + u
Where b0 = interest represents returns on other days of the month
b1 = coefficient
represents returns on Turn of the Month (TOM)
d1(TOM) = dummy variable indicating the presence of TOM or not
For finding the weekend effect we have used :
Nifty returns = b0 + b1d1(Monday) + b2d2(Friday) + u
Where b0 = intercept which represents returns on rest of the days other than Monday
And Friday
b1 = coefficient which represents return on
Monday
d1(Monday) = dummy
variable used for indicating the presence of Monday or not
b2 = coefficient which
represents return on Friday
d2(Friday) = dummy variable used for indicating the presence of Friday or not
HYPOTHESIS
For
Turn of the year effect return on all the months is same ,i.e.,
H0 : b0=b1=b2
H1
: at least one is indifferent
For Turn of the month effect return on all days of the month are same ,i.e.,
H0 : b0=b1
H1 : at least one is indifferent
For
Weekend effect return on Monday and Friday and other days of the week are same
,.i.e.,
H0 : b0=b1=b2
H1 : at least one is indifferent
If the dummy variable for any one day or month is significant , we know that effect is significant of the anomaly which the dummy variable is representing then we are rejecting the null hypothesis and accepting the alternate hypothesis. If there is no significant pattern of anomaly found then we are accepting the null hypothesis and rejecting the alternate hypothesis.
CONCLUSION
All the three indices Nifty 50, Nifty Midcap 50 and Nifty Smallcap 50 are showing positive turn of the month effect and Nifty 50 is also showing positive returns on other weekdays like Tuesday, Wednesday and Thursday. All three indices are showing negative returns on Monday but it is found to be statistically insignificant and Nifty 50 and Nifty Smallcap 50 is also showing negative return on Friday, So weekend effect is not present in all the three indices but Nifty 50 is showing another anomaly with positive returns on other weekdays which is statistically significant. All the three indices are showing negative return on January effect ( turn of the year effect ) and positive return on April ( financial year starting of Indian Market) but it is also statistically insignificant and also for January effect, So turn of the year effect (January) is also not present in Indian stock markets Nifty 50, Nifty Midcap 50 and Nifty Smallcap 50. Comparatively all the indices are showing the same market anomaly except Nifty 50 which is also showing another market anomaly other than the two indices.Nifty Midcap 50 is showing highest return than Nifty Smallcap 50 and Nifty 50 in turn of the month effect and Nifty Smallcap 50 is showing greater return than Nifty 50 on turn of the month effect. So in the end the Indian market Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50 are still not efficient.
REFERNCES
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Mr. Tarun Kumar Kadyan, BA Hons. Economics (batch 20-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. tarunkadyan17@gmail.com
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