CALENDAREFFECTSONSTOCKMARKETRETURNS:

EVIDENCEFROMTHESTOCKEXCHANGEOFMAURITIUS

SewrajD*,SeetanahB^*,SannaseeV*,SoobadurU*,&SeetanahB**
*FacultyofLawandManagement
UniversityofMauritius
**RMIT,Melbourne,Australia

^Corresponding author: b.seetanah@uom.ac.mu

ABSTRACT
Efficient market stated that stocks return is indifferent in each trading day. But, the calendar effects
phenomenon made a different return in each single day in a week or month. This is an abnormal
return which can affect investor in deciding investment strategy, portfolio selection, and profit
management. This study investigates the day of the week effect, more precisely the Monday effect and
the January effect on the Stock Exchange of Mauritius (SEM) in order to get the information whether
these anomalies exist or not. Linear regression model, GARCH and EGARCH models are used to
answer our objective. The result shows that Monday effect is nonexistent in SEM. However, we find a
significant positive January effect at market level. This study also concludes that volatility shocks are
persistent in both daily and monthly returns and moreover, reports the presence of leverage effect in
the daily stock returns.

Electronic copy available at: http://ssrn.com/abstract=1594871

INTRODUCTION
Capital market efficiency has been a very popular topic for empirical research since Fama
(1970) introduced the theoretical analysis of market efficiency and proclaimed the Efficient
Market Hypotheses. Subsequently, a great deal of research was devoted to investigate the
randomness of stock price movements for the purpose of demonstrating the efficiency of
capital markets. Since then, all kinds of calendar anomalies in stock market return have been
documented extensively in the finance literature. Thus, it follows that market participants
can make extraordinary returns by observing past development of market returns, as the latter
follow a seasonal pattern which violates the assumption of weak market efficiency.
The study of calendar effects is relevant for financial managers, financial counsellors, market
professionals and investors in general, and all those interested in developing profitable
trading strategies. In a decision-making process, a rational financial decision maker must take
into account not only returns but also the variance (risk) or volatility of returns. It is
important to identify whether there are variations in volatility of stock returns and whether a
high (low) return is associated with a high (low) volatility for a given time. If certain patterns
in stock return volatility can be identified, then investors would make investments decisions
based on both return and risk easier. Uncovering certain volatility patterns in returns might
also benefit investors in valuation, portfolio optimization, option pricing and risk
management.
Studies on calendar effects have overwhelmingly been concentrated on developed country
cases (see Mehdian and Perry, 2001; Sullivan, Timmermann, and White, 2001; Steeley, 2001
and Chen and Singal, 2003) with very few studies related to developing countries and to our
knowledge none to small island developing state. As such this paper explores the calendar
effects on the stock market returns laying particular emphasis on the stock exchange of the
island of Mauritius and this is believed to bring an interesting supplement the literature. The
Stock Exchange of Mauritius Ltd (SEM), was incorporated in 1989, as a private limited
company responsible for the operation and promotion of an efficient and regulated securities
market in Mauritius, Since then, the SEM has made some important strides in its
development process and has undertaken a number of reforms for the enhancement of the
operational and regulatory efficiency of the local market.

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Electronic copy available at: http://ssrn.com/abstract=1594871

In the context of this study, two types of seasonalities are investigated here namely the
Monday effect and January effect in stock returns (SEMDEX). This paper seeks to provide
evidence on the day of the week effect and month of the year effect in the Stock Exchange of
Mauritius not only for return by using the Ordinary Least Squares method and GARCH (1,1)
specification, but also for both return and volatility specifications by using the EGARCH
(1,1) model.
The paper is organised as follows, in Section 2, some of the relevant previous studies on
January effect and Monday effects are briefly discussed. In section 3, the data, the different
statistical methodologies used for estimating the calendar effects, including several
descriptive statistics are presented. This section also provides the analysis of the results adn
section 4 concludes.

SECTION 2: LITERATURE REVIEW

STOCK MARKET ANOMALIES
With the development of Efficient Market Hypothesis, some contradicting studies-market
efficiency anomalies are also going on. Market efficiency anomalies are evidence that seems
inconsistent with the efficient market hypothesis. They indicate either market inefficiency
(profit opportunities) or inadequacies in the underlying asset-pricing model. After they are
documented and analyzed in the academic literature, anomalies often seem to disappear,
reverse, or attenuate. This raises the question of whether profit opportunities existed in the
past, but have since been arbitraged away, or whether the anomalies were simply statistical
aberrations that attracted the attention of academics and practitioners. Some of the different
kinds of anomalies are related to Fundamental anomalies, Technical Anomalies and Calendar
anomalies. It is noteworthy that this paper

CALENDAR EFFECTS
Calendar effect also is called seasonality effect. We can simply see from the meaning of
words, it is about the time. Actually, the seasonality effect which includes many effects
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dealing with the time is one of the main patterns of the market efficiency anomalies. The
people try to specify a certain period of time or a group of time to test the special
phenomenon about the stock returns, then to see if any rules we can follow or any speculation
opportunities we can catch. The first ever studies in calendar anomaly starting in 1930s and
include: January effect, the Monday effect, and the month of the year effect, monthly effect,
holiday effect, and turn of the year effect.
The day of the week effect has been intensively studies since the end of 70s. Most
researchers employ the simple linear regression model (to mention few French (1980),
Gibbons and Hess (1981), Jaffe and Westerfield (1985)).
However, as Connolly (1989, 1991) claim, several specific problems may arise while using
this approach: a) The returns are likely to be auto correlated; b) The residuals are possibly
non-normal; c) The issue of heteroskedasticity may arise; d) Outliers with high/low value of
return may distort the overall picture. Connolly (1989) therefore suggested using GARCH on
dummies, in order to deal with auto correlation and heteroskedasticity issues.

MONDAY EFFECT
Monday effect is the tendency for Monday stock returns to be low relative to other weekdays
and on average negative. Early market practitioners identified the Monday effect at least as
early as the 1920s, well in advance of the advent of studies manipulating electronic databases.
Kelly (1930) cites a three-year statistical study that identified Mondays as the worse day to
buy stocks. He ascribes the cause of the low Monday returns to, among other factors,
weekend decision making processing by individual investors.
Further Tests on U.S. Equity Markets
The first application of rigorous statistical testing of the difference in weekday returns results
from French (1980) studying the S&P 500 Index over the period 1953 through 1977 and from
Gibbons and Hess (1981) studying the S&P 500 Index and CRSP value- and equallyweighted indexes for NYSE and AMEX securities over the period 1962 through 1978. Keim
and Stambaugh (1984) extend the period over which the weekday seasonal is examined for
the S&P 500 Index and examine actively traded OTC securities. Linn and Lockwood (1988)
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examine a larger sample of OTC securities. Using different time frames and different sets of
securities, these authors all find a statistically significant difference in returns across
weekdays and a significantly negative return for Monday.

On the other hand, some recent papers present evidence that the Monday effect in the US and
UK stock markets has gradually disappeared. For example, Fortune (1998) shows that after
1987 there is no evidence of a negative weekend return. Mehdian and Perry (2001) show that
in the 1987-1998 periods Monday returns are not significantly different from returns during
the rest of the week for the SP500, DJCOMP and NYSE (large-cap) indexes. Also, Coutts
and Hayes (1999) also show empirically that the Monday effect exists but is not as strong as
has been previously documented for the UK stock indexes.
There are four types of explanation for Monday effect
1. The Monday Effect and Statistical Errors
Some scholars, for instance Sullivan, Timmermann, and White (2001) suggest that an
apparent Monday effect arises from employing erroneous statistical methods. They have
argued that the weekday effect and other seasonal arise from data mining. For instance,
Sullivan, Timmermann, and White (2001) argue in the Journal of Econometrics that calendar
effects result from data mining. Their application of a new bootstrap procedure fails to
identify a weekend effect or other calendar effects. This conclusion, however, ignores the
vast replicatory work done on the weekend effect using many different statistical methods
and data samples.
2. Micro Market Effects
A second class of explanations involve the market microstructure, more specifically, issues
about settlement, dividends, and taxes. French (1980) proposed the calendar time hypothesis,
which would suggest that expected returns be actually larger over the weekend (Friday to
Monday) because of the three calendar days in between versus the usual one calendar day for
other days of the week. This hypothesis is at odds with the data. In 1982, Lakonishok and
Levi suggested that expected returns should be different across days due to the 5-day
settlement period, which has the effect of making expected returns higher on Fridays and

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lower on Mondays relative to either a trading or calendar time model. The general consensus
appears to be that the data does not support the precise predictions of their hypothesis. Board
and Sutcliffe (1988) present evidence that shows that settlement procedures in the U.K.
market tend to moderate the negative Monday effect. Thus, studies of international markets
provide mixed evidence on the influence of market microstructure factors in explaining the
Monday effect.
Further, in 1991, Branch and Echevarria conjectured that tax considerations that influence
share price response to ex-dividend status may influence the weekend effect if ex-dividend
dates are not systematic across weekdays. However, micro market explanations of the
weekend effect have not received strong empirical support in U.S. equity markets as they
found no difference, however, between samples of no dividend and ex-dividend securities.
3. Information Flow Effects
A third explanation involves different rates of flow of micro and macro information.
Basically, the release of bad news tends to be delayed until the weekend, according to French
(1980). Also, Steeley (2001) argues that the Monday effect in the UK stock market is related
to the systematic pattern of market wide news arrivals that concentrates between Tuesdays
and Thursdays. However, a number of studies have found that this does not explain the whole
effect.
4. The Role of Order Flow
Another set of explanation invokes the differential trading patterns of various market
participants, i.e. individuals are net sellers on Mondays, and individuals behave differently on
Mondays versus other days of the week. Or else, it could also be due to short selling activity short sellers close their position on Fridays as it is difficult to monitor over weekends
(perhaps most of them go on holiday). They sell the stocks on Monday leading to a fall in
prices. There are some studies that have documented different behavior of individuals on
Mondays versus other days. For example, Pettengill (1993) finds that individuals were much
more likely to invest in risky assets when the experiments were conducted on Fridays than
when they were on Mondays.

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Also, Chen and Singal (2003) apply a similar argument to short sellers. They argue that
speculative short sellers seek to closely monitor their positions in order to limit potential
losses. Because they would be unable to close their position over the weekend, they tend to
buy stocks on Fridays to close their open position and to reopen their position on Monday by
borrowing and selling stocks. This trading would tend to increase returns on Friday and
decrease returns on Monday.
Diminishing Monday effect
Although numerous researchers have offered explanations for negative Monday returns for
equity securities, none appears entirely satisfactory. Prevalence of this phenomenon argues
against explanations that dismiss it as due to misapplication of statistical methodology or as a
result of micro market structure. Likewise rational pricing explanations have produced mixed
empirical success, at best. Although patterns in information flow seem logical, empirical
results from examination of these flows likewise do not provide promising results. The most
consistent findings rely on variation on order flow patterns from various traders. Empirical
tests have done little to clarify, however, how these order flows are influenced by various
other patterns such as monthly return patterns. Further, although changes in transaction costs
might explain a reduction in the Monday-Friday return differential, it should not reverse this
differential as evidenced by large-firm securities in recent years. Last, it is not clear why
traders who never paid transaction costs would not have eliminated this pattern earlier
Other researchers report different findings. Cornell (1985) and Najand and Yung (1994) see
no weekend effect in the S&P 500 index futures: the effect seems to exist, they argue,
because the returns are affected by conditional heteroskedasticity. Connolly (1989) points out
that the effect disappears for some years and then reappears for others. Wang, Li, and
Erickson (1997) find that the Monday effect occurs primarily in the last two weeks (the
fourth and fifth weeks) of the month. For the UK stock market, Board and Sutcliffe (1988)
see the significance of the anomaly decreasing over time, and Steeley (2001) notes that the
weekend effect disappeared in the 1990s. Sullivan, Timmermann and White (2001) assert that
calendar effects, including day of the week effect, no longer remain significant in the context
of 100 years of data as the full universe. Seyed and Perry (2001) report evidence of reversal
of the Monday effect in major US equity markets.

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JANUARY EFFECT
Stocks exhibit both higher returns and higher risk premiums in January. These results have
been corroborated in many foreign markets. But the higher returns accrue primarily to smaller
stocks. January does not appear to be an exceptional month for larger-capitalization issues.
An increasing collection of papers has found out that the average return to stocks in the
month of January is higher than in any other month of the year. This seasonal anomaly is
known in the literature as the January effect. The January effect is first studied by Wachtel
(1942). By using Dow Jones Industrial Average, Wachtel (1942) finds seasonality in stock
prices for the time period 1927-1942. Rozeff and Kinney (1976) also found high returns in
January. Keim (1983) uses monthly dummies to test for the January effect and also proves the
relationship between the January effect and size effect by computing regression for size
portfolio. Many subsequent studies also substantiate this effect. A typical definition of the
January effect is the tendency of the stock to rise between the last day of December and the
end of the first week of January. In the literature of the January effect, most of the studies
support the existence of the effect, and especially the January effect is more significant for
small firms. There are various explanations for the January effect, while tax-loss selling,
window dressing, data mining and performance hedging are the most popular ones.
Tax-Loss Selling Hypothesis
Many researchers argue that it individual investors who are driving the January effect by
selling their losing stocks in December, in order to realize capital losses for tax purposes,
then using the funds from these sales to re-establish their position in small capitalization
stocks in January, thus driving up prices. To preface the discussion of evidence of tax-loss
selling driving the January effect, it is necessary to qualify it with an explanation of why the
focus tends to be on individual investors. As most agree that January is driven by small
stocks, the focus automatically shifts to individual investors as institutional money managers
are generally focused on large specialization equities. If individuals have equity positions that
have accrued losses, they may wish to sell them before the end of the year in order to realize
these losses for tax purposes; also institutional investors are not usually concerned with tax
losses.

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In Wachtel (1942), the main explanatory factor for the seasonal effect was tax-loss selling.
He argues that investors sell in mid December and the following rally in stock prices in both
late December and January is purely a reaction from low stock market levels earlier in the
month. Roll (1983) argues that since small capitalization stock are more volatile; they are
better candidates for tax-loss selling. Interestingly, he also finds that tax-loss selling is
present in large firms as well; however as large firms are generally highly liquid, the effect is
arbitraged away. Rolls findings support the idea of individual ownership, as he argues that
the small firms are driving the tax-loss selling explanation.
When considering the taxloss selling hypothesis as an explanation for January effect,
numerous researches conducted tests to see if the effect existed before tax laws were in place
in the US and are as follows. Firstly, Rettengill (1986), using 1913 as the first taxable year
finds no evidence of a post tax January effect. However, the period from 1918 to 1929 did
exhibit a significant January effect, confirming the tax-loss selling hypothesis. Moreover,
Brailsford and Easton (1993) found a much more significant January effect over the post-tax
period, however conclude that the tax-loss selling hypothesis cannot fully explain the
seasonal anomaly.
Chen and Singals paper (2004) is a very recent supporter for the tax-loss selling hypothesis.
In the first part, Chen and Singal (2004) test the existence of the January effect based on the
sample of common stocks traded on the New York Exchange (NYSE), the American Stock
Exchange (AMEX), and NASDAQ. The result is that the five-day January return is 2.1%,
which is higher compared with the five day December return of 1.1%. This implies the
continued existence of the January effect.
Many who argue against tax-loss selling as the solution, particularly Jones, Pearce, and
Wilson (1987), Pettengill (1986) and Berges, Mc Connell and Schlarbaum (1984), find that
the phenomenon existed prior to Federal income taxes, therefore making the hypothesis void.
Also Fountas and Segredakis (2002), in a study on emerging markets, find that while
seasonality in stock returns exists in many countries, there is little evidence to prove that the
tax-loss selling hypothesis explains the January effect.

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Explanations of January effects other than the Tax-loss selling Hypothesis encompass i)
Window Dressing (see Ritter and Chopra (1989), Lakonishok, Shleifer and Vishny (1991)
Eakins, and Sewell (1994), Ligon (1997) and Chen and Singal (2004) ii) Capital Asset
Pricing Model (Reinganum, Stoll and Whaley (1983) iii) Intergenerational Transfers
Hypothesis (Gamble (1993)) iv) Invertors Liquidity (Ogen (1990)) adn v) Data Mining
(Sullivian, Timmermann and White (2001))
Declining January effect
Although providing various kinds of explanations, most of the studies in the literature of the
January effect show evidence which supports this anomaly. However, some papers even
reject the January effect, and the most famous of these studies are by Anthony. One of
Anthonys paper (2003), which focuses on the U.S equity markets, shows a declining effect.
His study is based on several indices including the Dow Jones 30 Industrial Average, the
S&P 500, the Russell 1000, the Russell 2000 and Russell 3000. For all the indices, the power
ratios are declining during 1988 through 2000, while none of the factors that cause the
January effect reported in the literature is declining in this period. This trend pronounced for
both small and large firms.

Section 3: DATA AND METHODOLOGY

RESEARCH OBJECTIVES AND ITS INTENDED BENEFITS
For the purpose of this study, two types of seasonalties are investigated here, namely the dayof-the-week effect and January effect in stock returns (SEMDEX). Using the Linear
Generalized Autoregressive Conditional Heteroskedasticity model, the main aims of this
research are to:
1) Assess the presence of seasonality in stock returns; more precisely testing the
presence of Monday effect and January effect in SEMDEX.
2) Test whether SEM is efficient in the weak form;
3) Assess whether there are opportunities for supernormal profits in the SEMDEX;

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4) Assess the impact of volatility on stock returns

This research shall also help investors in deciding when to invest on the SEMDEX in order to
maximise their returns as they can use the day-of-the-week effect and January effect
information to avoid and reduce the risk when investing in the Mauritian stock market.
Moreover, it can be of great help to scholars, portfolio managers, investors to find out about
seasonality in SEMDEX.

DATA
In order to carry a research on a particular subject, a researcher needs to collects data for
carrying out the research. Data can be categorized in two forms, namely, primary data and
secondary data. Primary data is information that is collected first hand by researches, for
example, surveys, interviews, and questionnaires. On the other hand, secondary data refers to
information that is already available and which is used by the researcher as a source of data
for his or her research. Different forms of secondary data include journals, census data,
newspaper articles and books. For the purpose of this study, secondary data would be used in
order to test for the seasonal effects on the stock exchange of Mauritius.
The data employed in this paper consist of the daily and monthly closing prices from
SEMDEX for the period January 1998 to December 2008, which have been obtained the
official website of the Stock Exchange of Mauritius. The reason why this period has been
chosen is that at the end of 1997, with the formation of a new electronic clearing and
settlement system and the beginning of daily trading, major developments of the SEM have
been recognized.
The SEMDEX is an index of prices of all listed shares and each stock is weighted according
to its share in the total market capitalization. Thus, changes, in the SEMDEX are dominated
by changes in the prices of shares with relatively higher market capitalization.

The index formula is as follows:

SEMDEX

Current

Market

Value

of

All

Listed

Shares

100

Base Market Value of All Listed Shares

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where the market value of any class of shares is equal to the number of shares outstanding
times its market price.
As we are interested in the behavior of returns primarily rather than the behavior of indices
themselves the choice of the returns definition might seem to be crucial. An adjusted return
was used in testing seasonal daily anomalies and is calculated as:
Rt = ln (Pt /Pt1)

Where, Rt denotes Stock Return at time period t; Pt denotes Stock price Index at time period
t; and Pt1 denotes Stock price Index at time period t-1. In the case of a day following a nontrading day, the return is calculated using the closing price indices of the latest trading day.
Irregular frequency data, for instance daily stock prices do not arrive in a precisely regular
pattern as the presence of missing days due to holidays and other market closures which
means that the data do not follow a regular daily (7- or 5-day) frequency. In order to run OLS
regression and estimate the GARCH model, the data have to be converted into regular
frequency data by using the Identifier series option in Eviews. Thus after excluding non
trading days, the daily time series consists of 2746 observations.

METHODOLOGY

To test for the Monday and the January effects in stock market returns the following
specification is proposed for the mean equation.
DRETt = B1D1 + B2D2 + B3D3 + B4D4 + B5D5 + ut

(1)

MRETt = B1D1 + B2D2 + B3D3 + B4D4 + B5D5 + B6D6 + B7D7 + B8D8 + B9D9+ B10D10 +
B11D11+ B12D12 + ut

(2)

In equation (1) B1, B2, B3, B4, B5 are parameters and D1, D2, D3, D4 and D5 are dummy
variables for Monday, Tuesday, Wednesday, Thursday and Friday respectively. D1 = 1 if the
return is on Monday and 0 otherwise; D2 = 1 if the return is on Tuesday and 0 otherwise; and
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so on. Similarly in equation (2) where the parameters B and the dummy variables D are 12
because of the 12 months of a year. For (2) D1 =1 for January and 0 otherwise, D2 =1 for
February and 0 otherwise and so on. The term ut is the disturbance term.
These models have been usually applied in the calendar anomalies literature. Firstly, the
above models will be estimated using the linear regression model (OLS) which assumes that
the data are normally distributed, serial uncorrelated and with constant variance (Wooldridge,
2003). We will examine whether that there are ARCH effects (ARCH-LM test). This is a
Lagrange multipler (LM) test for autoregressive conditional heteroskedasticity (ARCH) in the
residuals (Engle 1982). This particular specification of heteroskedasticity was motivated by
the observation that in many financial time series, the magnitude of residuals appeared to be
related to the magnitude of recent residuals. ARCH in itself does not invalidate standard LS
inference. However, ignoring ARCH effects may result in loss of efficiency.
For the purpose of this study, both OLS method and GARCH models will be employed as
the latter have an advantage over the ordinary least squares (OLS) regression in the sense that
it takes into consideration of not only the mean but also the risk or volatility of return. As
such, both the risk and return, which constitute the fundamentals of investment decision
process, are accounted for. In this respect, a better decision may be reached if an investor has
prior knowledge of whether there are variations in stock returns by the calendar effects and
whether a high daily or monthly return can be attributed to the correspondingly high
volatility. Moreover, revealing the specific volatility patterns in returns might also benefit
investors in risk management and portfolio optimization. In addition to this, the principle
advantage of employing GARCH models is the ability to capture the common empirical
observations in daily time series: fat tails due to time-varying volatility, skewness resulting
from mean non-stationarity, nonlinearity dependence, and volatility clustering. In addition to
this, if properly specified, the GARCH models should be able to significantly reduce the
excess skewness and kurtosis present in normal returns and also significantly remove the
ARCH effects.
The GARCH model was invented by Bollerslev (1986), and used in the study of calendar
effects by Connolly (1989). Instead of considering heteroskedasticity as a problem to be
corrected, the GARCH models treat heteroskedasticity as a variance to be modelled. As a

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result, not only are the deficiencies of least squares corrected, but a prediction is computed
for the variance of each error term.
GARCH MODEL

The GARCH (1, 1) model suitable for the studying of calendar anomalies is defined as:

Rt = + t

(3)

t ~ N(0, t2)

(4)

t2 = + 1 t-12 + 1 t-12

(5)

Where in equation (3), daily stock return, Rt, is regressed on a constant, ; t is an error term
which is dependent on past information and t2 is the conditional variance.
For the conditional variance, t2, to be nonnegative and positive, the following conditions
must be met: > 0 ; 1 0 and 1 + 1 <1
Engle and Bolleslev (1986) show that the persistence of shocks to volatility depends on the
sum of 1 + 1. Values of the sum lower than unity imply a tendency for the volatility
response to decay over time, at a slower rate the closer the sum is to unity. In contrast, values
of the sum equal to (or greater) unity imply indefinite (or increasing) volatility persistence to
shocks over time. It is often observed that downward volatilities in financial markets are
followed by higher volatilities than upward movements of the same magnitude.

E-GARCH MODEL

However, in spite of the apparent success of the GARCH model, there are some features of
the data, which this model is unable to pick out. For instance, non negativity constraints may
be violated and GARCH models cannot account for leverage effects. To deal with this

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problem, Nelson (1991) proposes the exponential GARCH or EGARCH model. Under the
EGARCH (1, 1) the conditional variance is given by

( )

( )

log t2 = + log t21 +

t 1

+ r t 1
t 1
t 1

Note that the left-hand side is the log of the conditional variance. This implies that the
leverage effect is exponential, and that forecasts of the conditional variance are guaranteed to
be nonnegative. The presence of leverage effects can be tested by the hypothesis that r0
and the impact is asymmetric if r 0.

ANALYSIS: MONDAY EFFECT

DESCRIPTIVE STATISTICS AND TEST
Table1: Summary statistics for daily Semdex returns across the days of the week for
different time periods.

Days
Monday
Tuesday
Wednesday
Thursday
Friday
ALL

Mean
0.000350
0.000279
0.000267
0.000286
0.000829
0.000403

StdDev
0.007060
0.007058
0.007370
0.006216
0.006853
0.006921

Skew.
0.337945
2.144718
0.711345
0.886217
0.816645
0.142070

Kurt.
31.14977
26.01129
14.10493
17.09404
27.86786
23.18399

Obs.
550
547
548
548
553
2746

From the table above, it can observed that the mean return seem to the lowest on Wednesdays
and highest on Fridays. And also, the mean return for Monday during this period is positive,
which is line with some recent papers that present evidence that the Monday effect in the US
and UK stock markets has gradually disappeared, for example Fortune (1998) and Mehdian
and Perry (2001).
As far as volatility is concerned, which is measured by standard deviation, it seems on
average to be lower on Tuesdays and higher on Fridays and Mondays across all years. Also,
there is negative skewness on Wednesday, Thursday and Friday. Excess kurtosis is present
for all days of the week, which means that ARCH/GARCH models have to be used to address
the excess kurtosis.
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The returns on Fridays tend to be higher than Mondays for the period 1988 to 2008 and it can
be depicted from the graph below. This observation is consistent with literature, in the sense
that Cross (1973 findings on the S&P 500 Index over the period of 1953 and 1970 indicate
that the mean return on Friday is higher than the mean return on Monday. Similar results are
reported by French (1980), who also studied the S&P 500 index for the period of 1953-1977.

Figure 1: Observation graph showing Monday and Friday returns (1998-2008)

OLS REGRESSION
Table 2: Showing linear regression results for daily returns

Monday
Tuesday
Wednesday
Thursday
Friday

Coefficient
0.000350
0.000279
0.000267
0.000286
0.000829

tstatistic
1.1843
0.9441
0.9020
0.9664
2.8117

Prob
0.2364
0.3452
0.3671
0.3339
0.0049

The results obtained in Table 2 is consistent with the studies of Rogalski (1984) who used
simple linear regression in order to test for the existence of day of the week effects on S&P
500 and DJIA indices and the results showed that the Monday effect was insignificant in his
testing.

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The coefficients from the OLS regression are consistent with our result in Table 10. All days
of the week have positive coefficients but which are all insignificant, except for Friday where
the p-value>0.05. Thus, there is the presence of day of the week effect on Friday. However,
the coefficient for the remaining days may be insignificant due to the presence of ARCH
effect, heteroskedasticity or serial correlation, all of which will be tested at a later stage in our
analysis. The GARCH (1, 1) model is also employed in order to get a better estimate of the
coefficients.
Moreover, the Durbin-Watson statistic in our output is 1.44, indicating the presence of serial
correlation in the residuals. The Durbin-Watson Statistic measures the serial correlation in the
residuals. As a rule of thumb, if the DW is less than 2, there is evidence of positive serial
correlation. There are better tests for serial correlation. In Testing for Serial Correlation, we
will later in our study discuss the Breusch-Godfrey Serial Correlation LM Test which
provides a more general testing framework than the Durbin-Watson test.

VOLATILITY IN DAILY STOCK RETURNS

The graph showing the daily return plotted on SEMDEX plotted against time can be observed
in Appendix 1, and it depicts the presence of volatility clustering. Financial time series, such
as stock prices, exchange rate, and inflation rate often exhibit the phenomenon of volatility
clustering. Volatility clustering or pooling refers the tendency for volatility for financial
markets to appear in bunches. Thus large returns (of either sign) are expected to follow large
returns, and small returns, and small returns (of either sign) to follow small returns.
Knowledge of volatility is of crucial importance in many areas. For instance, investors in the
stock market are obviously interested in the volatility could mean huge losses or gains and
hence greater uncertainty. In volatile market it is difficult for companies to raise capital in the
capital markets.
A characteristic of most of these financial time series is that in their level form they are
random walks; that is, they are nonstationary. On the other hand, in their first difference
form, they are generally stationary. Therefore, instead of modelling the levels of financial
time series, why not model their first difference? But these first often exhibit wide swings, or
volatility, suggesting that the variance of financial time series varies over time. And a method
to model the varying variance is the ARCH/GARCH model, which will be used for the
purpose of this study, originally developed by R.Engle.
xxiii

TESTING FOR STATIONARITY

Table 3: Augmented Dicker-Fuller test
Augmented
Dicker-Fuller
Test Statistic
Test critical values: 1% Level
5% Level
10% Level

t-statistic
-39.36226

Prob*
0.0000

-3.432540
-2.862393
-2.567269

*Mackinnon(1996)onesidedpvalues
Laglength:0(AutomaticbasedonSIC,MAXLAG=27)Schwerts(1989)principle,thatiskmax=12(n/100)^(0.25)

The augmented Dickey-Fuller (ADF) statistic, used in the test, is a negative number. From
the table above we conclude that the daily SEMDEX return is a non-stationary process when
tested at level.
Decision rule:
If

t* > ADF critical value, ==> not reject null hypothesis, i.e., unit root exists.

If

t* < ADF critical value, ==> reject null hypothesis, i.e., unit root does not exist.

The ADF statistic value is -39.36 and the associated one-sided p-value for is zero. In addition,
EViews reports the critical values at the 1%, 5% and 10% levels. Notice here that the tstatistic value less than the critical values so that we reject the null at conventional test sizes,
i.e. the data is stationary and doesnt need to be differenced.

TESTING FOR SERIAL CORRELATION

The Durbin-Watson statistic can be difficult to interpret, thus in order to test for first-order
serial correlation in residuals, the Breusch-Godfrey test is used.
Table 4: Breusch-Godfrey test
Breusch-Godfrey Serial Correlation LM Test:
F-statistic
229.6976
Obs*R-squared
212.3950

Prob. F(1,2740)
Prob. Chi Square(1)

0.0000
0.0000

Hypothesis setting for serial correlation:

xxiv

Null hypothesis: No serial correlation in the residuals (u)

Alternative

: There is serial correlation in the residuals (u)

The output presents the test statistics and associated probability values. The test regression
used to carry out the test is reported below the statistics. The statistic labelled Obs*Rsquared is the LM test statistic for the null hypothesis of no serial correlation. The
(effectively) zero probability value strongly indicates the presence of serial correlation in the
residuals. Since the p-value (0.0000) of Obs*R-squared is less than 5 percent (p<0.05), we
reject null hypothesis meaning that residuals (u) are serially correlated which is not desirable.
TESTING FOR HETEROSKEDASTICITY
Table 5: HeteroskedasticityTest:Whitetest
HeteroskedasticityTest:White
Fstatistic0.361796
Obs*Rsquared1.449055
ScaledexplainedSS16.07310

Prob.F(1,2741)0.8359
Prob.ChiSquare(1)0.8356
Prob.ChiSquare(1)0.0029

Dependentvariable:RESID^2
Collineartestregressorsdroppedfromspecification

Hypothesis setting for heteroskedasticity

Null hypothesis Ho

: Homoscedasticity (the variance of residual (u) is

constant)
Alternative hypothesis H1 : Heteroskedasticity (the variance of residual (u) is
not constant )
The Obs*R-squared statistic is Whites test statistic, computed as the number of observations
times the centered R2 from the test regression, and it follows a chi square distribution. If the
chi square value exceeds the critical value at the chosen level of significance, the conclusion
is that heteroskedasticity is present.
The p-value of Obs*R-squared shows that we cannot reject the null hypothesisl. So residuals
have constant variance which is desirable meaning that residuals are homoscedastic.

HISTOGRAM AND STATISTICS

xxv

Appendix 2 shows the skewness and Kurtosis of the distribution. The Skewness is a measure
of asymmetry of the distribution of the series around its mean. Since there is a negative
skewness of -0.142070, we conclude that the distribution has a long left tail. On the other
hand, Kurtosis measures the peakedness or flatness of a distribution. The Kurtosis of a
normal distribution is three. If the Kurtosis exceeds three, which is the case here, then the
distribution is flat (playkurtic) relative to the normal.
Departure from normality has also been tested using the Jarque-Bera Statistic. The hypothesis
for Jarque-Bera Statistic is as follows:

Null Hypothesis: residuals (u) are normally distribution

Alternative: Not normally distributed

Since the p-value of Jarque-Bera statistics is less than 5 percent (0.05) we can reject null and
accept

the

alternative,

that

is

residuals

(u)

are

not

normally

distributed.

TESTING FOR ARCH EFFECTS AFTER OLS REGRESSION

Table 6: ARCH LM Test
HeteroscedasticityTest:ARCH
Fstatistic1028.452
Obs*Rsquared748.5446

Prob.F(1,2744)0.0000
Prob.ChiSquare(1)0.0000

Table 6 reveal the inadequacy of OLS model as there are remaining ARCH effects due to the
untreated volatility of the returns in the models for various periods of study. Such volatility
needs to be modelled in order to provide a clearer picture of the monthly seasonal anomalies
on SEMDEX. Thus GARCH (1, 1) and EGARCH (1, 1) models are estimated for this
purpose in this analysis.

GARCH (1,1) MODEL

Table 7: Showing results of GARCH (1, 1) estimation of the mean equation for Monday
effect

Coefficient

zstatistic
xxvi

Prob

Monday
Tuesday
Wednesday
Thursday
Friday

0.000191
0.000109
0.000515
0.000363
0.000413

1.1843
0.9441
0.9020
0.9664
2.8117

0.2560
0.5259
0.0003
0.0175
0.0063

The results from Table 7 indicate that the highest return is observed on Wednesday
(0.0000515) and the lowest return is on Tuesday (0.000109), followed by Monday
(0.000191). The table reports day of the week effect on return equation. The estimated
coefficients for the all the week day dummy variables are positive and statistically significant
except for the Monday and Tuesday Dummy variables, where the p-value > 0.05. Thus, there
is no indication of Monday effect. This result seems to be contrary to the findings of French
(1980) and Agrawal and Tandon (1994) who found significantly negative returns on Monday.
This shows that the market is efficient in its weak form which states that share price
movement cannot be predicted in advance to form a trading strategy. The GARCH parameter
is close to 1, implying that the volatility shocks are persistent. For the daily returns on
SEMDEX it equals 0.817.
In Table 8, we include four new days of the week dummy variables in the conditional
variance equation in addition to the return equation. The variance equation reflects a
statistically significant and negative volatility and the highest being on Monday. In addition
to this, the conditional standard variance graph in Appendix 3 shows brief periods of high
volatility.
Table 8: Showing results of GARCH (1, 1) estimation of the variance equation for the
Monday effect

Monday
Tuesday
Wednesday
Friday

Coefficient
0.0000250
0.0000367
0.0000306
0.0000446

zstatistic
11.23203
18.14575
16.82445
21.90199

Prob
0.0000
0.0000
0.0000
0.0000

TESTING FOR ARCH EFFECT AFTER GARCH (1, 1) ESTIMATION

Table 9: ARCH LM Test
HeteroscedasticityTest:ARCH

xxvii

Fstatistic1.791573
Obs*Rsquared48.94757

Prob.F(1,129)0.0074
Prob.ChiSquare(1)0.0077

The Engle's ARCH LM tests indicate that there is no autocorrelation and no ARCH effects in
the standardized residual terms. Hence, the results of the specification tests are favourable.
We consider 27 lag orders. The Durbin Watson test also concludes that there is no presence
of serial correlation.

EGARCH (1, 1) MODEL

The EGARCH (1, 1) model allows returns to be asymmetrically correlated with future
volatility. Since the EGARCH (1, 1) model is in logarithmic form, there is no restriction on
the parameters in the EGARCH model in the condition that the sum of the terms must not
exceed unity in order to guarantee that the process is stationary. Volatility tends to rise in
response to bad news and to fall in response to good news.
Table 10: Showing EGARCH estimation for the day of the week effect

C(2)
C(3)
C(4)
C(5)

Coefficient
0.562893
0.332951
0.005699
0.968250

zstatistic
0.017892
0.007720
0.005663
0.001695

Prob
0.0000
0.0000
0.3143
0.0000

From Table 10, it can be seen that C (5) is negative and statistically significant indicating
significant leverage effect. The persistence parameter, C (5), is very large, implying that the
variance moves slowly through time. The asymmetry coefficient, C (4), is positive, implying
that the variance goes up more after positive residuals than after negative residuals.

ANALYSIS: JANUARY EFFECT

AN INFORMAL STUDY OF THE MONTHLY DATA SET

xxviii

Figure 2: Chart showing mean of monthly returns

According to the chart above, it can be clearly seen that monthly stock returns on SEMDEX
are higher in January than in other months. This result is consistent with literature. The first
studies, by Rozeff and Kinney (1976), Dyl (1977) and Brown et al. (1983) analyze the US
stock market and observe significant higher returns in January than in the other months of the
year. More recently, Haugen and Jorion (1996), Tonchev and Kim (2004) and Rosenberg
(2004) reach empirical findings similar to prior studies.

OLS REGRESSION
Table 11: Showing linear regression results for monthly returns

January
February
March
April
May
June
July
August
September
October
November
December

Coefficient
0.001901
0.000213
-0.000082
0.000051
-0.000012
0.000982
0.000075
0.000029
0.000441
0.000266
0.000887
0.000213

T-statistic
2.955158
0.407202
-0.127349
0.078976
-0.018388
1.526818
0.117092
0.044288
0.0.684953
0.413321
1.378772
0.331049

Prob.
0.0038
0.6846
0.8989
0.9372
0.9854
0.1294
0.9070
0.9647
0.4947
0.6801
0.1705
0.7412

After computing OLS regression, we conclude that the results from Table 11 are consistent
from the chart above, which shows that the highest return is in the month of January and the
lowest being on March. However, only the January return is statistically significant as Pxxix

value for that month < 0.05. Thus, the conclusion from the OLS regression is that January
effect is present.
The returns of the other months of the year may be statistically insignificant due to the
presence of ARCH effects, heteroscedasticity or serial correlation which will all be tested at a
later stage in our study.
TESTING FOR STATIONARITY
Table 12: Augmented Dicker Fuller Test-unit root test

Augmented DickerFuller Test

Statistic
Testcriticalvalues:1%Level
5%Level
10%Level

tstatistic
8.115519

Prob*
0.0000

3.480818
2.883579
2.578601

*Mackinnon(1996)onesidedpvalues
Laglength:0(AutomaticbasedonSIC,MAXLAG=12),Schwerts(1989)principle,thatiskmax=12(n/100)^(0.25)

Decision rule:
If

t* > ADF crtitical value, ==> not reject null hypothesis, i.e., unit root exists.

If

t* < ADF critical value, ==> reject null hypothesis, i.e., unit root does not exist.

The ADF statistic value is -8.11 and the associated one-sided p-value for is zero. In addition,
EViews reports the critical values at the 1%, 5% and 10% levels and t-statistic value less than
the critical values so that we reject the null at conventional test sizes, i.e. the data is stationary
and doesnt need to be differenced

TESTING FOR SERIAL CORRELATION

Table 13: Breusch-Godfrey test
BreuschGodfreySerialCorrelationLMTest:
Fstatistic18.05260
Obs*Rsquared17.38707

Prob.F(1,132)0.0000
Prob.ChiSquare(1)0.0000

Hypothesis setting for serial correlation:

xxx

Null hypothesis

: No serial correlation in the residuals (u)

Alternative

:There is serial correlation in the residuals (u)

The output presents the test statistics and associated probability values. The statistic labelled
Obs*R-squared is the LM test statistic for the null hypothesis of no serial correlation. The
(effectively) zero probability value strongly indicates the presence of serial correlation in the
residuals. Since the p-value (0.0000) of Obs*R-squared is less than 5 percent (p<0.05), we
reject null hypothesis meaning that residuals (u) are serially correlated which is not desirable.
TESTING FOR HETEROSKEDASTICITY
Table 14: HeteroskedasticityTest:WhiteTest
HeteroskedasticityTest:White
Fstatistic1.474295
Obs*Rsquared15.71516
ScaledexplainedSS30.78495

Prob.F(1,2741)0.1499
Prob.ChiSquare(1)0.1599
Prob.ChiSquare(1)0.0012

Dependentvariable:RESID^2
Collineartestregressorsdroppedfromspecification

Hypothesis setting for heteroscedasticity

Null hypothesis Ho

: Homoscedasticity

(the variance of residual (u) is

constant)
Alternative hypothesis H : Heteroskedasticity (the variance of residual (u) is
not constant )
If the chi square value exceeds the critical value at the chosen level of significance, the
conclusion is that heteroskedasticity is present. The p-value of Obs*R-squared shows that
we cannot reject null. So residuals have constant variance which is desirable meaning that
residuals are homoscedastic. Thus, we do not reject the null hypothesis

HISTOGRAM AND STATISTICS

From Appendix 4, it can be observed that there is a negative skewness of -0.424805, thus
concluding that the distribution has a long left tail. On the other hand, Kurtosis measures the
peakedness or flatness of a distribution. The Kurtosis of a normal distribution is three, and it

xxxi

can be seen that the kurtosis is 5.740618 and thus the distribution is flat (playkurtic) relative
to the normal.
Departure from normality has also been tested using the Jarque-Bera Statistic. The hypothesis
for Jarque-Bera Statistic is as follows:

Null Hypothesis: residuals (u) are normally distribution

Alternative: Not normally distributed

Since the p-value of Jarque-Bera statistics is less than 5 percent (0.05) we can reject null and
accept the alternative, that is residuals (u) are not normally distributed.
TESTING FOR ARCH EFFECTS AFTER OLS REGRESSION
Table 15: ARCH LM Test
HeteroscedasticityTest:ARCH
Fstatistic21.81333
Obs*Rsquared18.94757

Prob.F(1,129)0.0000
Prob.ChiSquare(1)0.0000

Table 2 reveal the inadequacy of OLS model as there are remaining ARCH effects due to the
untreated volatility of the returns in the models for various periods of study. Such volatility
needs to be modelled in order to provide a clearer picture of the monthly seasonal anomalies
on SEMDEX. Thus GARCH (1, 1) and EGARCH (1, 1) models are estimated for this
purpose in this analysis.

RESULT FROM GARCH (1, 1) ESTIMATION

Table 16: Showing results of GARCH (1, 1) estimation of the mean equation for January
effect

January
February
March
April
May
June
July

Coefficient
0.001793
0.000169
0.000448
0.000685
0.0000148
0.000484
0.000125

Std. Error
0.000493
0.000638
0.000638
0.000410
0.000800
0.000547
0.000378
xxxii

Z-statistic
3.638418
0.265196
-1.094426
-1.769058
-0.018559
0.885856
-0.330865

Prob.
0.0003
0.7909
0.2738
0.0769
0.9852
0.3756
0.7407

August
September
October
November
December

0.000214
0.000915
0.000887
0.001166
0.000361

0.000440
0.000422
0.000466
0.000586
0.000304

0.485538
2.166072
1.902676
1.988370
1.188201

0.6273
0.0303
0.0571
0.0468
0.2348

Table 16 reports monthly effects on return equation. The estimated coefficients for the all the
months are positive. But only the returns on January, September and November are
significant, as the p-value < 0.05. This shows that the month of the year effect is present.
The results indicate that the highest return is observed on January (0.001793) and the lowest
return is on November (0.001166), followed by September (0.000915). Thus, from the table
above, it can be concluded that there is the presence of January effect on SEM, which is in
line with the findings of Rozeff and Kinney (1976), Bhardwaj and Brooks (1992) and
Eleswarapu and Reinganum (1993) who found the presence of January effect on the NYSE
stocks for different periods of time. Moreover, the GARCH parameter is 0.499716, indicating
that there are volatility shocks.
Table 17: Showing results of GARCH (1, 1) estimation of the variance equation for the
January effect

January
February
March
April
May
June
July
August
September
November
December

Coefficient
-9.22E-07
-5.48E-06
-1.96E-06
-6.61E-07
-5.32E-06
-3.25E-06
-7.18E-07
-2.55E-06
-8.59E-07
-6.45E-06
-2.82E-06

Std. Error
3.01E-06
1.04E-06
1.69E-06
3.98E-06
2.77E-06
1.44E-06
1.90E-06
4.01E-06
2.48E-06
2.79E-06
2.04E-06

Z-statistic
-0.306886
-5.272291
-1.157193
-1.165942
-1.921445
-2.256938
-0.378163
-0.635814
0.347161
-2.311718
-1.378794

Prob.
0.7589
0.0000
0.2472
0.8682
0.0547
0.0240
0.7053
0.5249
0.7285
0.0208
0.1680

Table 17 shows that the variance equation reflects a statistically significant February and
November dummy variables and shows that negative volatility is the highest in November.
Thus the January effect may be due to the varying volatility as the January coefficient is
insignificant in the variance equation. Also, the conditional standard deviation graph in
Appendix 5 also show brief periods of high volatility.

xxxiii

HISTOGRAM NORMALITY TEST AFTER GARCH (1, 1) ESTIMATION

After using the GARCH (1,1) model, the kurtosis is close to 3, and the Jarque-Bera statistic
has a p-value of 0.32, implying that the data are consistent with a Normal distribution (and
constant variance). These results are displayed in Appendix 6.

TESTING FOR ARCH EFFECT AFTER GARCH (1, 1) ESTIMATION

Table 18: ARCH LM Test

HeteroscedasticityTest:ARCH
Fstatistic0.000661
Obs*Rsquared0.000671

Prob.F(1,129)0.9795
Prob.ChiSquare(1)0.9793

ARCH-LM test does not indicate the presence of the ARCH effect. These results indicate that
our model does not have a misspecification problem, and standardized residual terms do not
have autocorrelation and constant variance.

EGARCH (1, 1) MODEL

Table 19: Showing EGARCH estimation for the January effect

C(2)
C(3)
C(4)
C(5)

Coefficient
8.691450
0.929478
0.241431
0.366745

zstatistic
4.119945
4.198626
1.422587
2.196819

Prob
0.0000
0.0000
0.1549
0.0280

In table 19, the leverage effect term, expressed as C (5) in the model, is positive and
statistically different from zero, indicating that the news impact is asymmetric during the
sample period. There seem to be no leverage effects on the monthly returns on SEM as the
coefficient is statistically positive. As such, negative news on SEM cause volatility to
increase less than positive news of the same magnitude.

SECTION 4: CONCLUSION
xxxiv

This paper examined in the analysis section examines the existence of a daily pattern of
calendar anomalies in the Mauritian stock market using Ordinary least Squares (OLS),
GARCH and EGARCH models applied to capture the different behaviour of the time varying
volatility in the return series of SEMDEX, for the period January 1998 to December 2008.
There was no indication of the presence the Monday effect. This result seems to be contrary
to the findings of French (1980) and Agrawal and Tandon (1994) who found significantly
negative returns on Monday. The OLS estimation reveals that there is no day of the week
effect in the period from January 1998 to December 2008. The fact that there is any
indication of the Monday effect is confirmed by employing the GARCH models, where the
coefficient representing Monday is insignificant. And also, the GARCH parameter indicates
that volatility shocks are persistent in the daily returns. The EGARCH model shows that there
is leverage effect, that is, negative news on the SEM cause volatility to increase more than
positive news of the same magnitude.
The second part of the analysis section which examines the January effect on stock returns
reveals that there is the presence of the January effect in the Mauritian stock market for the
chosen period, by using both linear regression model and GARCH model. These findings are
consistent with the studies of Rozeff and Kinney (1976), Bhardwaj and Brooks (1992), and
Eleswarapu and Reinganum (1993) which found significant January effect across many stock
markets. However, the January effect cannot be explained by varying volatility as the January
coefficient is still significant in the variance equation. Besides, investors can use the January
effect information to avoid and reduce the risk when investing in the Mauritian stock market.
Also, it has been observed that there is no leverage effect on monthly returns on SEM, which
means that negative news on the SEM cause volatility to increase less than positive news of
the same magnitude.

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xxxviii

APPENDICES

Appendix 1: graph showing volatility on daily stock returns from January 1998 to December
2008

Appendix 2: The EViews outputs showing a histogram of the data series plus major
descriptive statistics for the daily returns after OLS regression

Appendix 3: Showing standard Deviation graph for daily SEMDEX returns from 1998 to
2008

xxxix

Appendix 4: The EViews outputs showing a histogram of the data series plus major
descriptive statistics for the monthly returns after OLS regression

Appendix 5: Showing standard Deviation graph for monthly SEMDEX returns from 1998 to
2008

xl

Appendix 6: The EViews outputs showing a histogram of the data series plus major
descriptive statistics for the monthly returns after GARCH (1, 1) estimation

xli