The problem of calendar anomalies became relevant for understanding stock market behavior effects and financial fluctuations. Until recently, the research was based on the premise that financial markets are self-regulating and stable entities, and financial results can be predicted by rational calculations. But recent research shows that stock markets are the object of certain economic anomalies, among which researchers point to widespread calendar anomalies.
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Calendar anomalies may occur when there is significant temporal change, which can occur yearly, daily, or weekly. These anomalies are easy to detect, but their examination and elaboration of necessary instruments for their prevention present more difficult tasks.
This research paper focuses on the analysis of calendar effects in the Karachi and Bombay stock markets. Relying on general research of this topic attempt is made to apply it to the realities of these markets, taking into consideration their special conditions.
The recent research of financial markets centered on various types of calendar anomalies. The analysis of January effect made by Rozeff and Kinney (1976) showed that returns on the stocks are higher at the beginning of the year (in January) than in any other period. This was shown in the analysis of the New York Stock exchange functioning during 30 years. This effect is often explained in fiscal policy terms on the part of investors. The sales at the end of the year presuppose fiscal loss since the listed prices are reduced in view of the purchase price. The Karachi and Bombay stock markets, as noted by Arumugam (1998), experience such events. We use his findings and the general research on the problem to analyze the contours of these phenomena in Indian and Pakistani stock markets in view of their recent liberalization.
Another calendar anomaly that we discuss in this paper in application to Karachi and Bombay stock market realities is the so-called turn-of-the-month effect. As Ariel notes, the end of the month can cause changes to behavior which produces high purchasing activities. In Indian and Pakistani stock exchange markets, this effect is quite obvious from the last of the fiscal year during the next six months. This case is explained in the paper by the higher liquidity of assets at the beginning of the year, which characterizes emerging liberalized markets such as Karachi and Bombay stock exchanges. This effect is deeply tied with other effects of the beginning of the year, such as the January and New Year effect, which is taken into consideration in the analysis of empirical data of the discussed stock markets. As Shashikant and Arumugam (1999), the dissemination of this effect in Indian and Pakistani stock markets can be explained by the dominance of free-floating and liberalized assets which can be an object of bullish demand.
Another calendar anomaly that we examine in application to Karachi and Bombay market is called the weekend effect. This effect causes high purchase activity and high returns on Friday. The relevance of this effect was analyzed by such financial analytic as Schwert (2002) in his study of the New York Stock Exchange operations for the period 1885-2002. In Karachi and Bombay stock, as Madhusoodanan (1997) shows, the negative effects of the weekend phenomenon was neutralized due to sufficient information program on this issue. Brokers and investors who came to know more about the consequences of the weekend effect significantly changed their behavior.
The best way to examine the weekend effect is to utilize Bombay Stock Exchange and Karachi Stock Exchange Indices. This approach is developed by many contemporary Indian and Pakistani scholars as diverse as Arumugam, Madhusoodanan, and Madhusoodanan.
Besides the abovementioned calendar effects, there some others that occur in the discussed markets. Among them, one should mention the holiday effect. According to
Ho R. and Y. Cheung (1994) this anomaly has to do with price quotations in the days that precede market closures in infra-week holidays. This effect in India and Pakistani stock markets showed higher returns when it took place on Friday and lower when it occurred in the period from Friday to Monday. This effect is even stronger if it occurs on national holidays such as the Day o Independence or New Year Day.
Besides this evidently economic and behavioral effect the study deals with uneasy to predict effects such as the Good Day Sunshine Effect. This effect concerns cause price variations which depend on the psychological conditions of investor which are in their turn tied with weather conditions (Ho and Cheung 1994). The judgments and investors’ action while influenced by economic calculations sometimes are sustained by feelings and emotional conditions which are not so easy to predict. In Karachi and Bombay these situations are widely registered by the abovementioned scholars. Based on the wide empirical data derived from these stock markets it is possible to assess the level and intensity of this effect and its role in overall deviations of economic activities.
Other effects that occur in Karachi and Bombay stock exchanges relate to daylight saving effect and additional not so widespread deviations, which this research deals with. The comprehensive assessment of calendar anomalies requires analysis of all adequate empirical data on these markets, which will be realized in the next chapters.
- Ariel, R.1987, ‘A monthly effect on stock returns’, Journal of Financial Economics, Vol. 18, 161-174.
- Arumugam, S. 1998, ‘High Stock Returns Before Holidays: New Evidence from India’, UTI-ICM Working Paper No.11,
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