Calendar Effects in Global Markets: An

Empirical Study (1987-2006)

Jie Hao

Master Thesis

VU University Amsterdam

Student number: 1631675

Faculty of Economics and Business Administration

Department of Finance

Dr. M. J. Boes

May 2008
Abstract

This paper studies calendar effects in global equity markets. The main calendar effects tested

in this paper are the weekend effect, the holiday effect and the fiscal year effect. The OLS

regression method and GARCH (1, 1) regression method are applied to stock indices for AEX

(Netherlands-Euro country), FTSE 100 (UK non-Euro country), NASDAQ (US) and NIKKEI

225 (Japan) starting from 1987-7-28 to 2006-12-29. After examining the normality,

stationarity and autocorrelation of daily returns and monthly returns, we test for the calendar

effects in each market. For the weekend effect, we found that the average returns on Monday

are negative for all markets during the whole time period. However, the result is only

statistically significant for the Japanese market at the 5% level. In addition, we found that

there is a significant Monday effect for the Dutch market during 1987-7-28 to 1990-12-31 and

1996-1-1 to 2000-12-31, for the UK and US market during 1987-7-28 to 1990-12-31, for the

Japanese market during 1991-1-1 to 1995-12-29, respectively (using linear model). Whereas,

we found that there is a significant positive Monday effect for the Dutch market during the

entire period (using GARCH (1, 1) model). For the holiday effect, we found that there is a

significant post-holiday effect in the Japanese market at the 5% level during the entire period

(both by linear model and GARCH (1, 1) model). Additionally, there is a significant

post-holiday effect in the UK market during 1987-7-28 to 1990-12-31 and a significant

pre-holiday effect during 1991-1-1 to 1995-12-29, respectively (using linear model). Finally,

for the fiscal year effect, we found a significant January effect at the 5% level in the US

market during July-1987 to December-2006 (using linear model).

KEYWORDS: Calendar effect; Weekend effect; Holiday effect; Fiscal year effect; OLS

regression; GARCH (1, 1) regression; Normality; Stationarity; Autocorrelation.

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1. Introduction

Numerous studies have been done to test whether capital markets are efficient, and therefore

its results have significant real-world implications for investors and portfolio managers. The

results of the studies are mixed; some support the efficient market hypotheses (EMH), while

others do not support the EMH. One of the famous studies that brought in some evidence,

which is against the efficient market hypotheses, is the calendar effect analysis. There are

empirical studies documenting that unexpected or anomalous regularities in security rates of

return, which are subject to above-average price changes in market indexes and can therefore

represent good or bad times to invest.

Economics is primarily a non-experimental science. Typically, we cannot generate new data

sets on which to test hypotheses independently of the data that may have led to a particular

theory. A striking example of a data-driven discovery is the presence of calendar effects in

stock returns, there appears to be a number of evidence of systematic abnormal stock returns

related to the day of the week, the week of the month, the month of the year, the turn of the

holidays, and so forth. However, the preceding evidence found were mainly based on stock

returns in the US capital markets, questions will be whether calendar effects exist at European

markets, Asian markets and the global markets.

The research question of this paper is whether there are still calendar anomalies in global

stock markets. The following calendar effects are going to be tested: the week day effect, the

holiday effect, and the fiscal year effect. The market indices of four stock markets (for the

period 1987-2006) are going to be included in the sample: AEX (Netherlands-Euro country),

FTSE 100 (UK-non Euro country), NASDAQ (US) and NIKKEI 225 (Japan). The frequency

of the observed values is daily based and monthly based.

Key findings of this paper are: For the weekend effect, we found that the average returns on

Monday are negative for all the markets during the whole time period. However, the result is

only statistically significant for the Japanese market at the 5% level. In addition, we found

that there is a significant Monday effect for the Dutch market during 1987-7-28 to

1990-12-31 and 1996-1-1 to 2000-12-31, for the UK and US market during 1987-7-28 to
2
1990-12-31, for the Japanese market during 1991-1-1 to 1995-12-29, respectively (using

linear model). Whereas, we found that there is a significant positive Monday effect for the

Dutch market during the entire period (using GARCH (1, 1) model). For the holiday effect,

we found that there is a significant post-holiday effect in the Japanese market at the 5% level

during the whole time period (both by linear model and GARCH (1, 1) model). Additionally,

there is a significant post-holiday effect in the UK market during 1987-7-28 to 1990-12-31

and a significant pre-holiday effect during 1991-1-1 to 1995-12-29, respectively. Finally, for

the fiscal year effect, we found a significant January effect at the 5% level in the US market

during July-1987 to December-2006 (using linear model).

The organization of this paper is as follows. In section 2, a literature review on efficient

capital markets and its hypotheses is given. Empirical tests of the EMH will be introduced

first, followed by the introduction of the calendar effect, such as the weekend effect, the

holiday effect and the fiscal year effect, which are under the general category of calendar

effects. In section 3, we describe the data and some pre-data analysis. In section 4, more

details on the regression approach (e.g., OLS method) will be shown, and result analysis will

be done after that. In section 5, we present supplementary empirical tests by GARCH (1, 1)

method. The analysis of the weekend effect, the holiday effect and the fiscal year effect will

all follow the procedures mentioned above. Concluding remarks will be given at the end of

the paper.

2. Literature Review

2.1 Efficient Capital Markets and Tests

An efficient capital market is one in which security prices adjust rapidly to the arrival of new

information, and therefore the current prices of securities reflect all information about the

security (Reilly & Brown 2005). There is no private information, all the information is

disclosed to the public. In other words, an efficient capital market is an informationally

efficient market. The question of whether capital markets are efficient is one of the most

3
controversial areas in investment research, and therefore its results have significant real-world

implications for investors and portfolio managers. An article by Fama (1970) divided the

overall efficient market hypothesis (EMH) and the empirical tests of the hypothesis into three

sub hypotheses depending on the information set involved: (1) weak-form EMH, (2)

semi-strong-form EMH, and (3) strong-form EMH.

The weak-form EMH states that stock prices fully reflect all the market information, thus

investors cannot use past market data to predict future returns. The results of most studies

consistently supported this hypothesis. The semi-strong-form EMH asserts that security prices

adjust rapidly to the release of all public information. The test of this hypothesis examines

whether there are opportunities to generate above-average rates of return from trading on the

basis of public information. The strong-form EMH states that security prices reflect all

information, which implies that there is no private information; nobody can generate

above-average returns consistently.

The hypotheses of EMH have been tested by many studies For example, some (see Fama

1970; Fama 1976) have supported the hypotheses and indicated that the capital markets are

efficient, while other studies (see Peavy & Goodman 1983; Peters 1991; Bernard & Thomas

1989) have revealed some anomalies related to these hypotheses, which do not support the

hypotheses. Especially in examining the semi-strong form hypothesis, the evidence from tests

of the semi-strong EMH is mixed. Studies include time-series studies on risk premiums,

calendar patterns, quarterly earnings surprises, the book value/market value ratio, and P/E

ratios. The results for event studies related to economic events such as stock splits, IPOs, and

accounting changes consistently supported the semi-strong form hypothesis. In contrast, some

studies that examined the possibility to predict rates of return on the basis of unexpected

quarterly earnings, P/E ratios, size, and BV/MV ratio, as well as several calendar effects,

generally did not support the hypothesis (Reilly & Brown 2005).

Recall that the semi-strong form EMH asserts that security prices adjust rapidly to the release

of all public information, that is, security prices fully reflect all public information. Different

from private information, public information is disclosed to every investor, such as historical

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stock prices, trading volumes, public announcement of a significant event, the release of

company quarterly earning reports, and so on. Whether investors can rely on the knowledge

of this public information to predict abnormal stock returns and make profits is interesting to

investigate. Thus “Calendar effect” may either indicate market inefficiency (profit

opportunities) or inadequacies in the underlying asset-pricing model (Schwert, 2003).

2.2 Calendar effects

In recent years, there has been a proliferation of empirical studies documenting unexpected or

anomalous regularities in security rates of return. These include seasonal regularities related

to the time of the day, the day of the week, the time of the month and the turn of the year. A

collection of theories that assert that certain days, months or times of year are subject to

above-average price changes in market indexes and can therefore represent good or bad times

to invest.

Calendar effects in stock markets have been a long-standing problem for financial economists.

Predictable anomalies become uneasy partners with the efficient market hypothesis. The

anomalies are often explained away when any economic significance gained is offset after

deducting the transaction costs and taking the “higher risk, higher return” principal into

consideration. The study of calendar anomalies has been widespread. Keim and Stambaugh

(1984) found consistently negative Monday returns for the S&P Composite as early as 1928.

French (1980) found negative Monday returns, this negative Monday return, or “weekend

effect”, had yet to be explained. A study by Kim and Park (1994) found out abnormally high

returns on the trading day before holidays in all three of the major stock markets in the US

(e.g., NYSE, AMEX and NASDAQ). Ritter (1988) pointed out that stock returns were higher,

on average, in January than in other months (i.e., January effect / fiscal year effect).

2.2.1 Weekend effects in stock returns

The distribution of daily stock returns depends on the day of the week. French (1980), in

testing whether daily stock returns are generated by a trading time or calendar time hypothesis,

provided convincing evidence of a negative market returns on Monday. For example, during

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the period from 1953 to 1977, the daily returns for the S&P’ composite portfolio on Monday

are -0.17%, compared to 0.02%, 0.1%, 0.05% and 0.09% on Tuesday, Wednesday, Thursday

and Friday, respectively. Under the trading time hypothesis, returns are generated only during

active trading and the expected return is the same for each day of the week. Whereas, under

the calendar time hypothesis, the process operates continuously and the expected return for

Monday is three times the expected return for other days of the week. In the US market,

numbers of studies have found weekend effect in the stock market (Keim, 1983; Rozeff and

Kinney, 1976; Roll, 1983; & Reinganum, 1983). Additionally, empirical studies have

provided convincing evidence that there are day-of-the-week effects (weekend effect) in the

US stock returns. Mondays’ average returns have been found to be negative (Smirlock &

Starks, 1986)). Studies have also been done to determine if there is a weekend effect anomaly.

Although the average return for the other four days of the week was positive, the average for

Monday was significantly negative during each of five-year sub-periods.

“It is well documented in the literature that Monday is an unusual day in the stock market.

Yet, this phenomenon appears to be influenced by the trading behavior of individual

investors” (Abraham and Ikenbery, 1994). Investors, in general, tend to use Monday as an

opportunity to fulfill liquidity needs. Selling activity by individuals is generally higher on

Monday than any other weekday. However, individuals bear substantially greater selling

pressure on Mondays following by negative returns in prior trading sessions.

Even if investigators conclude that the negative returns on Monday are evidence of market

inefficiency, any individual acknowledges the negative Monday returns cannot benefit from

securities trading continuously. Based on this information, a simple strategy would be for an

individual to purchase the S&P composite portfolio every Monday afternoon and sell them on

Friday afternoon, ignoring transaction costs, holding cash during the weekend. This trading

rule would generate an average annual return of 13.4% from 1953 to 1977, while a buy and

hold policy would yield a 5.5% annual return (French 1980). However, in the real world, no

investors can eliminate transaction costs.

If an individual believes that there is a market inefficiency that the expected return from

6
Friday to Monday is negative, then he can try to increase his expected return by altering the

time of trading, he could delay his purchases plan for Thursday or Friday until Monday when

stock prices are lower, and executes sales plan for Monday on the preceding Friday when the

returns are positive.

2.2.2 Holiday effect on stock returns

Another well-known calendar anomaly comprises a holiday effect, most characteristically a

pre-holiday effect. On the trading day prior to holidays, stocks advance with disproportionate

frequency and show high mean returns averaging nine to fourteen times the mean return for

the remaining days of the year (Ariel, 1990).

Marrett and Worthington (2007) revealed that the holiday effect accounts for some 30 to 50

percent of the total return on the US market in the pre-1987 period, but the most promising

explanation for the holiday effect lies in investor psychology. This hypothesis suggests that

investors tend to buy shares before holidays because of “high spirits” and “holiday euphoria”,

however, it has proven difficult to test directly.

In the US, the seminal study on holiday effects is by Lakonishok and Smidt (1988). They

defined holidays as eight public holidays on which the market was closed. These holidays are:

New Year’s Day, President’s Days (formerly Washington’s Birthday), Good Friday,

Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas. Some of these

holidays happen to be on weekdays and therefore encounters an extra stock market closing,

by contrast, other holidays happen to be on weekends and thus do not encounters an extra

stock market closing. Using the Dow-Jones Industrial Average from 1897 to 1986,

Lakonishok and Smidt (1988) found that the average pre-holiday rate of daily return was 0.22

percent, compared with a regular daily rate of return of less than 0.01 percent. These results

were subsequently mirrored by Ariel (1990) in a study of CRSP equal-weighted and

value-weighted indices from 1963-1982. Kim and Park (1994) found a US holiday effect

using market indicators in the NYSE, AMEX and NASDAQ from 1963-1987 and 1987-1993,

respectively. However, recent work in the US suggested that the holiday effect was fading.

Vergin and McGinnis (1999) found that the holiday effect had greatly disappeared for large
7
firms but persist for small caps firm, but the effect had decreased over time. For example,

they compute the ratio pre-holidays returns from 1987-1996 to prior research and get

statistically significant result (e.g., 0.43 for NASDAQ and 0.47 for AEX).

The holiday effect has also received an increasing attention outside the US. One of the

international studies of the holiday effect was done by Marrett & Worthington (2007). They

examined the holiday effect in Australian daily stock returns at the market and industry levels

and for small capitalization stocks from Monday 9 September 1996 to Friday 10 November

2006. A regression-based approach was employed, the results indicated that the Australian

market provided evidence of a pre-holiday effect in common with small cap stocks. However,

no evidence was found of a post-holiday effect in any market or industry.

Moreover, a strong pre-holiday effect is also detected in Hong Kong stock market from 1995

to 2005, as documented in McGuinness’s recent paper (2005). In this paper, Hang Seng Index

is picked base on a Hong Kong close-to-close, Hong Kong open-to-close and Hong Kong

close to London close basis. A Chinese Lunar New Year (CLNY) effect highly significantly

explains Hong Kong’s overall pre-holiday return effect. Furthermore, Karim and Laura (2005)

found festivities effect for ten countries in the Middle and Far-East where the main festivities

occur every year at a different time of the Western Gregorian calendar. They showed that the

Singapore stock market suffers from February effect by the Chinese Lunar New Year also.

2.2.3 Fiscal year effect on stock returns

The fiscal year effect, also known as “January effect”, refers to the phenomenon that January

stock returns on average are higher than in other months. Analysis of the data from the New

York Stock Exchange (NYSE) for the period 1904 to 1974 concluded that nearly one third of

the total annual return for a typical stock occurs in January (Kang & Wickremasinghe, 1999).

Ariel (1987) documents a monthly pattern in United States stock returns. Stocks were found

to earn a positive average return in the beginning and during the first half of calendar months

and zero average returns during the second half.

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This rally is generally attributed to investors buying stocks that have dropped in price

following a sell-off at the end of December, in order to create tax losses to offset any capital

gains. Such theory, advanced by Wachtel (1942) and by Dvl (1977), is the tax-loss selling

hypothesis: individual investors sell securities that have declined in value at year-end to

realize losses and thus reduce taxable income. But the tax-loss theory is now considered less

important because more people are using tax-sheltered retirement plans and therefore have no

reason to sell at the end of the year for a tax loss. For example, the January effect is found to

be existent in the Japanese stock market while capital gains are not taxed.

There are still many hypotheses in testing the theory of “January effect”, the

“parking-the-proceeds” hypothesis, advanced by Ritter (1988). According to this particular

theory, investors “park” the proceeds at the end of the year and reinvest them in January, thus

drive up stock prices. The “portfolio rebalancing” hypothesis, studied by Ferdenia (1990), and

Athanassakos and Schnabel (1994) claimed that the brushing up of balance sheets or “window

dressing” were manipulated by the portfolio managers, who are motivated by

performance-based remunerations and seek to lock in superior performances by the year-end.

The January effect has withstood the test of time, Chatterjee and Balasundram (1997) used

more recent data and reported the existence of the January effect from data between 1987 and

1992, it was said to affect small-caps firm more than mid or large cap firms. This historical

trend, however, had been less pronounced in recent years since the markets had adjusted for

the effect. Haugen and Jorion (1996) used a data set consisting of all NYSE stocks for the

period from 1926 to 1993 and found no evidence such that the January effect has disappeared,

“Perhaps the January effect is not a manifestation of market inefficiency and hence not

arbitragable or perhaps markets may be slower to arbitrage away inefficiencies than

previously thought”.

Studies towards emerging stock markets, such as some South-East Asian countries show a

significant January return, these returns typically exceed the mean of all other months by 10

to 20 times. This pattern indicates January returns are statistically significant, which can be

confirmed for Hong-Kong, Korea and Taiwan (Wong, 1990). However, for both Taiwan and

9
Korea the evidence from Tong (1992) is that February (for Taiwan) and May (for Korea)

returns are the highest. Also, Chan and Khanthavit (1996) analyzed returns in Malaysia, India,

Singapore and Thailand from 1974 to 1992, and found that only Malaysia and Singapore have

significant January monthly returns.

Later studies have shown that the January effect is highly sensitive to a few extreme

observations. After the removal of a few extreme returns, Kang and Wickremasinghe (1999)

have found that the highly significant anomaly, at the level far greater than the 1% level,

becomes no longer statistically significant, even at the 10% level. They suggested that the

January effect depended on a few extreme observations, four to six years with extremely well

performing January months would ensure that the effect would continue for the next twenty

or thirty year period, but it was not predictable as to which specific years those extreme

returns would display.

Since the January effect is effectively an illusory phenomenon, it is not surprising that it has

not been satisfactorily explained.

Evidence on the magnitude of monthly seasonal patterns in the UK can also be found in a

wide variety of papers. One of the earlier papers focused primarily in the UK market is

Reinganum and Shapiro (1987). They used a variety of data sources and found April returns

were the largest in the year without the introduction of capital gains taxation in 1965, while

after 1965, January returns were the largest in the year.

3. Data and Methodology

3.1 Data Description

In this study, data are retrieved from DataStream. Daily and monthly AEX, FTSE 100,

NASDAQ and NIKKEI 225 index values are used as proxies for equity prices in the

Netherlands, UK, US and Japan, respectively. The AEX index, derived from Amsterdam

Exchange index, is a stock market index composed of Dutch companies that trade on

10
Euronext Amsterdam, formerly known as the Amsterdam Stock Exchange. Started in 1983,

the index is composed of a maximum of 25 of the most actively traded securities on the

exchange. The FTSE 100 index is a share index of the 100 most highly capitalized companies

listed on the London Stock Exchange and it represents about 80% of the market capitalization

of the whole London Stock Exchange. The NASDAQ is an American stock exchange. It is the

largest electronic screen-based equity securities trading market in the United States. With

approximately 3,200 companies, it lists more companies and on average trades more shares

per day than any other U.S. market. NIKKEI 225 is a stock market index for the Tokyo Stock

Exchange (TSE). The NIKKEI average is the most watched index of Asian stocks. It has been

calculated daily by the Nihon Keizai Shimbun (NIKKEI) newspaper since 1971. It is a

price-weighted average (the unit is Yen), and the components are reviewed once a year.

The sample period of daily returns starts from July 28, 1987 and ends on December 29, 2006.

Monthly prices for these four indices are also used. The sample period starts from July 1,

1987 and ends on December 1, 2006. The returns for each market are expressed in local

currency and have been calculated as natural logarithms in first differences according to the

following expression:

Rt = Ln (Pt / Pt-1), (1)

where Pt and Pt-1 account for index values in period t and t-1 respectively. The period is also

divided into the following sub periods; 1987-7-28 to 1990-12-29, 1991-1-1 to 2006-12-29,

1991-1-1 to 1995-12-29 and 1996-1-1 to 2000-12-29. The rationale behind dividing the

period into several sub periods is that anomalies may not persist over time. An investigation

of the whole period makes it difficult to perceive non-persistent anomalies as they tend to

average out over time.

3.2 Normality check

Normality test results of daily returns are shown in descriptive statistics table (Table 1) and

the histogram of all the four indices are provided (see Figure 1a to 1d) for the whole period

(1987-7-28 to 2006-12-29).
11
Table 1: Descriptive Statistic Table of AEX, FTSE 100, NASDAQ and NIKKEI 225

(1987-7-28 to 2006-12-29).

NL(AEX) UK(FTSE100) USA(NASDAQ) JAPAN(NIKKEI 225)

Mean 0.000276 0.000193 0.000341 -6.63E-05
Median 0.000426 0.000119 0.000720 0.000000
Maximum 0.111819 0.075970 0.132546 0.124303
Minimum -0.127789 -0.130286 -0.120478 -0.161354
Std. Dev. 0.013159 0.010340 0.014353 0.013969
Skewness -0.318829 -0.787851 -0.218486 -0.116172
Kurtosis 11.86468 14.42484 11.07459 10.26885

Jarque-Bera 16683.17 28092.76 13810.91 11170.85

Probability 0.000000 0.000000 0.000000 0.000000

Sum 1.401551 0.980359 1.728421 -0.336008

Sum Sq. Dev. 0.877589 0.541861 1.044006 0.988873

Observations 5069 5069 5069 5069

Figure 1a: Histogram of AEX for the whole period (1987-7-28 to 2006-12-29).

2400
Series: NLDAILY
Sample 1 5070
2000 Observations 5069

1600 Mean 0.000276

Median 0.000426
Maximum 0.111819
1200 Minimum -0.127789
Std. Dev. 0.013159
800 Skewness -0.318829
Kurtosis 11.86468
400
Jarque-Bera 16683.17
Probability 0.000000
0
-0.10 -0.05 -0.00 0.05 0.10

The normal distribution has skewness equal to zero and kurtosis equal to three. However,

from Table 1, the normality hypothesis is rejected for all significance levels for all markets

using the full sample period. From Figure 1a to 1d, we can conclude that daily returns of each

market are not normally distributed. Monthly returns of each market are not normally

distributed either (results are shown in the Appendix A and B). Given the simple model
12
Figure 1b: Histogram of FTSE 100 for the whole period (1987-7-28 to 2006-12-29).

2400
Series: UKDAILY
Sample 1 5070
2000
Observations 5069

1600 Mean 0.000193

Median 0.000119
1200 Maximum 0.075970
Minimum -0.130286
Std. Dev. 0.010340
800 Skewness -0.787851
Kurtosis 14.42484
400
Jarque-Bera 28092.76
Probability 0.000000
0
-0.10 -0.05 -0.00 0.05

Figure 1c: Histogram of NASDAQ for the whole period (1987-7-28 to 2006-12-29).

2400
Series: USADAILY
Sample 1 5070
2000
Observations 5069

1600 Mean 0.000341

Median 0.000720
1200 Maximum 0.132546
Minimum -0.120478
Std. Dev. 0.014353
800 Skewness -0.218486
Kurtosis 11.07459
400
Jarque-Bera 13810.91
Probability 0.000000
0
-0.10 -0.05 -0.00 0.05 0.10

structures we will specify in this section, we probably need to be cautious in hypothesis

testing later on. However, the problem of non-normality disturbances is less severe in our

application because of the large number of observations we use.

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Figure 1d: Histogram of NIKKEI 225 for the whole period (1987-7-28 to 2006-12-29).

2000
Series: JAPANDAILY
Sample 1 5070
1600 Observations 5069

Mean -6.63e-05
1200 Median 0.000000
Maximum 0.124303
Minimum -0.161354
800 Std. Dev. 0.013969
Skewness -0.116172
Kurtosis 10.26885
400
Jarque-Bera 11170.85
Probability 0.000000
0
-0.15 -0.10 -0.05 0.00 0.05 0.10

3.3 Stationarity check for returns

The usual properties of the least squares estimator in a regression using time series data

depend on the assumption that the time series variables involved are stationary stochastic

processes (see R. Carter Hill, Griffiths & Judge, 2001). A stationary stochastic process

indicates that the unconditional mean and unconditional variance are constant over time. If it

is not stationary, there will be several consequences, which lead to least squares estimators,

test statistics and predictors that are unreliable. As a result, we first plot time series for each

index from 1987-7-28 to 2006-12-29 (see Figure 2a to 2d). Secondly, we applied two

methods to check whether the series of returns are stationary, namely, the Augmented

Dickey-Fuller test (ADF) and Phillips-Perron test (PP). The ADF test is a common test for

unit roots in a time series sample. It consists of regressing the first difference of the series

against a constant, the series lagged one period, the differenced series at n lag lengths and a

time trend (Pindyck & Rubinfeld, 1998). If the coefficient of ρ is significantly different from

zero, then the hypothesis that r is non-stationary is rejected (equation 2).

Δrt = α + βiΔrt-i + λt + ρrt-1 + εt. (2)

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Figure 2a: Daily Log-Returns of AEX Index (1987-7-28 to 2006-12-29).

Figure 2b: Daily Log-Returns of FTSE 100 Index (1987-7-28 to 2006-12-29).

Figure 2c: Daily Log-Returns of NASDAQ Index (1987-7-28 to 2006-12-29).

Figure 2d: Daily Log-Returns of NIKKEI 225 Index (1987-7-28 to 2006-12-29).

15
Similar to the ADF test, the Phillips-Perron (PP) tests that the null hypothesis which the

variable contains a unit root, whereas, the alternative is that the variable is stationary. The PP

test uses Newey-West standard errors to account for serial correlation in the disturbances,

while the Augmented Dickey-Fuller test uses additional lags of the first-difference variable.

Both the ADF test and the PP test can be carried out with and without the constant and trend.

One has also to choose the appropriate lag length. If a series is found to be non-stationary, one

should difference the series until the stationarity is established.

Figure 2a to 2d plot the returns series for AEX, FTSE 100, NASDAQ and NIKKEI 225 index

respectively, where all the indices show that the series vary randomly at a constant level and

with constant dispersion. Thus, we can conclude that there is no specific trend pattern towards

all these four indices, which indicates our data is stationary.

Table 2a to 2d present the results of the ADF and PP tests for the Netherlands, UK, US and

Japan market, respectively. We take five and ten lags as well as the presence of the intercept

and trend or the absence of the intercept and trend for all market indices. Numbers without

parentheses are the critical value at the 1% significance level, whereas, numbers with

parentheses are the t statistic value. If ADF and PP test values are lower than the critical value

at the 1% level, all the returns are stationary under all the four conditions. The results show

that the absolute value of each t statistic is much higher than each absolute value of the

critical value. This reflects that we can strongly reject the null hypothesis and conclude that

the returns are statistically stationary. Observe that in Table 2a to 2d there is not a big

difference between “Constant” and “Constant and Trend” results. That is not so strange given

the figures 2a to 2d.

3.4 Autocorrelation check for the returns

Because we assume that the errors (εt) in the linear regression model are uncorrelated random

variables in order to apply OLS regression method. Thus, we need to check if residuals are

serially dependent (i.e., autocorrelation). If it turns out that the residuals are serially correlated,

the OLS estimator will in most cases be unbiased and consistent, but generally inefficient.

16
Table 2a: Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) Stationarity Tests

of AEX Index (1987-7-28 to 2006-12-29).

Table 2b: Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) Stationarity Tests

of FTSE 100 Index (1987-7-28 to 2006-12-29).

Table 2c: Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) Stationarity Tests

of NASDAQ Index (1987-7-28 to 2006-12-29).

17
Table 2d: Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) Stationarity Tests

of NIKKEI 225 Index (1987-7-28 to 2006-12-29).

However, in case of serially correlated disturbances the standard error of the parameter

estimates needs to be adjusted for the purpose of statistical inference. Several techniques are

available including a Durbin-Watson test (i.e., DW), a Lagrange-Multiplier (i.e., LM) test and

a correlogram test. However, since the LM test is an approximate large-sample test, and we

have a large number of observations (e.g., daily returns from 1987-7-28 to 2006-12-29 and

monthly returns from July-1987 to December-2006), thus we will include the LM test for the

daily returns and monthly returns, respectively, in our analysis. Autocorrelation test results of

daily returns and monthly returns using the LM method are shown in Table 3a to 3d and

Appendix C, respectively, for the whole period (1987-7-28 to 2006-12-29; July-1987 to

December-2006). If the coefficient of ρ is significantly different from zero, then the null

hypothesis that there is no autocorrelation is rejected (equation 3).

rt= α + β1*x1 + ρεt-1 + vt. (3)

From Table 3a, 3b and 3d, it shows that the null hypothesis of no autocorrelation is not

rejected at the 5% significance level. Thus, we can conclude that there is no autocorrelation in

the daily residuals for the Netherlands, UK and Japanese markets for the whole time period.

Hence, we can safely use OLS standard errors for hypothesis testing. In contrast, from Table

3c, it shows that the null hypothesis of no autocorrelation is rejected at the 5% significance

level. So there is autocorrelation among time-series data for the US market. Thus, in order to

get an efficient estimator for the standard errors, we will use Newey-West standard errors

18
Table 3a: Breusch-Godfrey Serial Correlation LM Test of AEX Index (1987-7-28 to
2006-12-29).

Table 3b: Breusch-Godfrey Serial Correlation LM Test of FTSE 100 Index (1987-7-28
to 2006-12-29).

Table 3c: Breusch-Godfrey Serial Correlation LM Test of NASDAQ Index (1987-7-28 to

2006-12-29).

Table 3d: Breusch-Godfrey Serial Correlation LM Test of NIKKEI 225 Index

(1987-7-28 to 2006-12-29).

4. Empirical results for the calendar effects

4.1 The day of the week effect

4.1.1 Empirical Methodology

Recall that the day of the week effect refers to the phenomenon where the market returns on

Monday tends to be negative. Thus we would expect that Monday returns are significantly

negative compared to the other days of the week. In order to test for a day of the week effect,
19
we estimate a simple regression model for each day of the week, where the regression

equation is specified:

Rt= E(Rt) + εt. (4)

In the regression, Rt is the particular daily returns on indices through different markets (i.e.,

AEX, FTSE 100, NASDAQ and NIKKEI 225 daily returns for Monday, Tuesday,

Wednesday, Thursday and Friday). E(Rt) is the expected daily return corresponding to which

day we selected as Rt.

Moreover, we test the null hypothesis of equal expected returns for each day of the week. In

order to test the null hypothesis, we apply a multiple regression based approach, where the

regression equation is specified:

Rt=α + β2*D2t + β3*D3t + β4*D4t + β5*D5t + εt. (5)

In the regression, Rt is the return on indices through different countries (i.e., AEX, FTSE 100,

NASDAQ and NIKKEI 225). And the dummy variables (i.e., D2t through D5t) represent the

day of the week on which the return is observed. The return on Monday is measured by α, and

β2 through β5 represent the differences between returns on Monday and returns for the other

four days of the week. If the expected return is the same for each day of the week, then the

estimates of β2 through β5 should be close to zero and the F-statistic measuring the joint

significance of the dummy variables should be insignificant.

4.1.2 Empirical Results

The average and standard errors of daily returns from 1987-7-28 to 2006-12-29 are presented

in Table 4a. Results of the average returns for the two sub-periods (1987-7-28 to 1990-12-29,

1991-1-1 to 2006-12-29) are shown in Table 4b and 4c.

From Table 4a, we can conclude that the average returns on Monday are not statistically

different from zero for all markets at the 5% significance level, except for the Japanese

market. Although there is no significant Monday effect for the Netherlands, US and UK

markets, the average returns on Monday are all negative for each market. Moreover, for the
20
US market, we can conclude that the average returns on Wednesday are statistically different

from zero at the 5% significance level. In order to detect more relevant information on

Monday, we divided the whole sample into some sub periods.

From Table 4b, for the Japanese market we could not find a significant Monday effect from

1987-7-28 to 1990-12-31 at the 5% significance level. But we found a significant Monday

effect on the other three markets (i.e., NL, US and UK). Additionally, we found a significant

Wednesday effect in the Dutch market from 1987-7-28 to 1990-12-31 at the 5% significance

level (see Table 4b). The opposite conclusions can be drawn from Table 4c. From that table,

we can conclude that there is a statistically significant Monday effect for Japanese market

from 1991-1- to 2006-12-29 using a 5% significance level, but there is no significant Monday

effect for the other three markets (i.e., NL, US and UK) during this period. Moreover, we find

a significant Wednesday effect using a 5% significance level in the US market within the

same period.

Hence, all the four markets yield similar result as previous findings especially during

1987-7-28 to 1990-12-31, except for the Japanese market, where significant Monday effect

appeared only during 1987-7-28 to 2006-12-29 and 1991-1-1 to 1995-12-29. Also, for the

Japanese market, lower and negative returns are shown on Monday during these periods.

However, as previous literature indicated, there should be a Tuesday effect instead of a

Monday effect in Japanese market (see Jaffe & Westerfield, 1985). In their paper, they used

Nikkei-Dow (ND) index and Tokyo Stock Exchange (TSE) index to test for the weekend

effect in Japan, and the whole sample was selected from 1970-1-5 to 1983-4-30. They found

that the lowest average returns for both two indices occur on Tuesday. The possible

explanation would be due to different time zones between Japan and United States, where

Tokyo is fourteen hours ahead of New York. As a result, they claimed that returns on

Tuesday in Japan might reflect the same information as the Monday return in the United

States. So according to this reason, our findings are not in line with previous studies.

The F-statistics are computed for each regression according to the time period and results are

21
Table 4a: Average Returns and T-test Using Market Indices (1987-7-28 to 2006-12-29).

* Average return is annually based and are computed as Rt = rt * 252 trading days. (rt = average daily return).

* Standard error is daily based

* T-test: test statistic = Average return / standard error (daily based)

Significant results at the 5 percent level are shown in bold.

22
Table 4b: Average Returns and T-test Using Market Indices (1987-7-28 to 1990-12-29).

* Average return is annually based and are computed as Rt = rt * 252 trading days. (rt = average daily return).

* Standard error is daily based

* T-test: test statistic = Average return / standard error (daily based)

Significant results at the 5 percent level are shown in bold.

23
Table 4c: Average Returns and T-test Using Market Indices (1991-1-1 to 2006-12-29).

* Average return is annually based and are computed as Rt = rt * 252 trading days. (rt = average daily return).

* Standard error is daily based

* T-test: test statistic = Average return / standard error (daily based)

Significant results at the 5 percent level are shown in bold.

24
reported in Table 5a and Table 5b. In Table 5a, we test the equality of expected returns for
each market for the whole time period from 1987-7-28 to 2006-12-29. In Table 5b, we test the
equality of expected returns for NL, UK and US markets from 1987-7-28 to 1990-12-31, and
for the Japanese market from 1991-1-1 to 1995-12-29, respectively. Equality of expected
returns is rejected at the 5% significance level.

However, from Table 5a, we can only observe that for the whole time period, only the US
market has significant weekday effects according to the F statistic value using a 5%
significance level. Thus, we further test the equality of expected returns by several
sub-periods. From Table 5b, for all markets, the F statistic value is larger than the 5% critical
level. Hence, for all markets we can reject the null hypothesis of equal expected returns
within the particular time periods.

Table 5c gives the results based on a multiple regression for the whole time period (1987-7-28
to 2006-12-29). The significant results indicate a significant difference between returns on
Monday and returns on the other days of the week. For example, for the UK market, the
returns on Monday compared with returns on Friday yield a significant difference, as can be
concluded from the t statistic values in Table 5c. For the US market, the returns on Monday
compared with returns on Wednesday and Thursday, respectively, yield a significant
difference as can be concluded from the t statistic values. For the Japanese market, we found a
significant Monday effect using a 5% significance level. More specifically, the returns on
Monday compared with returns on Tuesday, Wednesday and Thursday, respectively, yield a
significant difference, as can be concluded from the t statistic values. However, no significant
results could be found for the Dutch market from 1987-7-28 to 2006-12-29

Table 5d shows more specific patterns for each market according to different sub periods.
Similarly, the significant results indicate a significant difference between returns on Monday
and returns on the other days of the week. For example, for the AEX index (1987-7-29 to
1990-12-31), there is a significant Monday effect using a 5% significance level. More
specifically, the returns on Monday compared with returns on Tuesday, Wednesday and
Friday, respectively, yield a significant difference, as can be concluded from the p-values in
Table 5d. In contrast, daily return differences between Monday and Thursday of AEX index
are significant during the period from 1996-1-1 to 2000-12-29. Also, during this period, there
is a significant Monday effect. In the UK market, only some significant figures could be
found during the period from 1987-7-28 to 1990-12-31. For example, there is a significant
Monday effect using a 5% significance level. And the returns on Monday compared with

25
Table 5a: Test for Equality of Mean Returns (1987-7-28 to 2006-12-29).

*Tests whether expected returns across days of the week are equal based on regression equation (5).
The null hypothesis of equal returns is rejected in the US market according to the time period. Time
period from 1987-7-28 to 2006-12-29 for NL, UK, US and Japanese markets.

**Significant at the 5 percent level.

Prob (F >2.37| n1 = 4, n2 = 5064) = 0.05

Table 5b: Test for Equality of Mean Returns (sub-periods).

*Tests whether expected returns across days of the week are equal based on regression equation (5).
The null hypothesis of equal returns is rejected in all cases according to the time period. Time period
from 1987-7-28 to 1990-12-31 for NL, UK and US markets. And time period from 1991-1-1 to
1995-12-29 for Japanese market.

**Significant at the 5 percent level.

Prob (F >2.37| n1 = 4, n2 = 890) = 0.05

Prob (F >2.37| n1 = 4, n2 = 1299) = 0.05

26
Table 5c: Tests for Day-of-the-Week effect Using Market Indices (1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

27
Table 5d: Tests for Day-of-the-Week Effect Using Market Indices for Several Time Periods.

Significant results at the 5 percent level are shown in bold.

28
Table 5e: Tests for Day-of-the-Week Effect Using Newey-West Standard Errors for the
US Index (1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

returns on Tuesday, Wednesday and Friday, respectively, yield a significant difference, as can
be concluded from Table 5d. In the US market, there is a significant Monday effect at the 5%
significance level. And the returns on Monday compared with returns on Wednesday and
Friday, respectively, yield a significant difference during the period from 1987-7-28 to
1990-12-31. Finally, for the Japanese market, from 1991-1-1 to 1995-12-29, there is a
significant difference between returns on Monday and returns on all the other days of the
week, including a significant Monday effect. As a result, our findings are not completely in
line with previous studies.

As we detect that there is autocorrelation in residuals for the US market, thus we will use
Newey-West standard errors for hypothesis testing of week day effect.

Results of the day of the week effect for the US market using Newey-West standard errors are
shown in Table 5e. From Table 5e, we can conclude that the results do not differ comparing
to the results shown in Table 5c for the US market. Thus, we can safely conclude that the
returns on Monday compared with returns on Wednesday and Thursday, respectively, yield a
significant difference as can be concluded from the t statistic values (1987-7-28 to
2006-12-29).

4.1.3 Result analysis

Based on the results in Table 4a, we can conclude that stock returns on average are negative
on Monday for all markets during the period from 1987-7-28 to 2006-12-29. However, the
negative average returns on Monday are not statistically significant at the 5% level, expect for
the Japanese market, where there is a significant negative Monday effect during this period.
Moreover, the results are inconsistent within sub periods. For example, during 1991-1-1 to
2006-12-29, positive Monday average returns were found in the Dutch and UK markets,

29
though the results are not statistically significant. Previous studies of the weekend effect
found that the mean return for Monday was significantly negative during five-year sub
periods and a total period (1953-1977). In contrast, the average return for the other four days
was positive (French, 1980). The study by Reilly and Brown (2005) decomposed the Monday
effect which is typically measured from Friday close to Monday close into a weekend effect
(from Friday close to Monday open), and a Monday trading effect (from Monday open to
Monday close). It showed that the negative Monday effect found in prior studies actually
occurs from the Friday close to the Monday open. After adjusting for this, the Monday trading
effect was insignificant.

Our data is measured from Friday close to Monday close, thus we don’t adjust for the
weekend effect. In our analysis, returns are generated continuously in calendar time, so the
distribution of returns for Monday will be different from the distribution of returns for other
days of the week. In other words, if stock returns are generated in trading time, the
distribution of returns will be the same for all five days of the week (French, 1980).

4.2 Holiday effect

4.2.1 Empirical Methodology

Recall that the holiday effect refers to the phenomenon where average returns on the trading
day prior to holidays are higher than other days of the year. Thus, we expect that the
pre-holidays returns are significantly higher than returns on the other days. Additionally, we
want to check whether there is a post-holiday effect, thus we expect that the post-holidays
returns are significantly higher than returns on the other days.

In order to test the holiday effect, a regression based approach is used. The following model is
specified with a pre-holiday dummy variable and a post-holiday dummy variable:

Rt= λ0 + λ1*Pre-HOL + λ2*Post-HOL + εt, (6)

where Rt is the daily market return, pre-HOL is a dummy variable representing the last
trading days before a public holiday and zero otherwise, Post-HOL is a dummy variable
representing the beginning trading days following a public holiday and zero otherwise, λ are
coefficients to be estimated where λ1 is the estimated return on the trading days before a
holiday, λ2 is the estimated return on the trading days following a holiday, λ0 is the estimated
return on all other trading days and εt is a random error term. The hypothesis tested is H0:
λ1=λ2=0, the alternative hypothesis is that λ1 and λ2 are not equal to zero. If the null

30
Table 6a: Descriptive Statistics for Pre-holiday Returns Using Market Indices
(1987-7-28 to 2006-12-29).

Day before holiday

(=1 if days are
before holiday) N Mean Std.deviation
NL(AEX) 0 4949 -6.71E-05 0.014
1 120 -3.21E-05 0.013
UK(FTSE100) 0 4833 0.0001 0.0104
1 236 0.001 0.010
USA(NASDAQ) 0 4959 0.0003 0.014
1 110 0.001 0.012
JAP(NIKKEI 225) 0 4945 -6.65E-05 0.014
1 124 -5.62E-05 0.013

hypothesis is rejected, then the returns exhibit a form of holiday seasonality (i.e., pre-holiday
effect and post-holiday effect).

In addition, the eight national holidays specified are according to the public holidays in each
country, but there are some holidays in common, such as New Year’s Day (1 January), Easter
Friday and Easter Monday, Christmas Day (25 December). In countries, such as Netherlands,
these are the holidays scheduled as non-trading and non-business weekdays, but in other
countries, there are still trading activities on some public holidays. As a result, dummy
variables are selected according to the public holidays for each country, not by if there is any
trading activity on that day.

4.2.2 Empirical Results

Descriptive statistics for pre-holiday returns in four markets for the whole time period are
shown in Table 6a. The mean of all these four indices’ daily returns before the holidays are
larger than the mean of returns on other days of the year. Table 5a also shows that the
standard deviations of all these markets’ returns before the holiday are less than the standard
deviations of returns on other days of the year.

Descriptive statistics of post-holiday daily returns in four markets for the whole time period
are shown in Table 6b. Relatively, the mean of all these four indices’ daily returns after the
holidays are larger than the mean of returns on other days of the year. In addition, the mean
differences between returns after holiday and returns on other days of the year for the
Netherlands and Japanese markets are much larger.

31
Table 6b: Descriptive Statistics for Post-holiday Returns Using Market Indices
(1987-7-28 to 2006-12-29).

Day after holiday

(=1 if days are
after holiday) N Mean Std.deviation
NL(AEX) 0 4949 -1.13E-04 0.014
1 120 1.85E-03 0.015
UK(FTSE100) 0 4839 0.0002 0.0104
1 230 0.0004 0.010
USA(NASDAQ) 0 4958 0.0003 0.014
1 111 0.002 0.015
JAP(NIKKEI 225) 0 4950 -1.29E-04 0.014
1 119 2.56E-03 0.015

Table 7a: Test for Equality of Mean Returns (1987-7-28 to 2006-12-29).

Test for Equality of Mean Return

Across Days of the Week for Each Country *
Degress of Freedom F-Statistic
Country (n 1 , n2 ) (F)
NL 2, 5066 0.45
UK 2, 5066 1.47
USA 2, 5066 0.61
JAP 2, 5066 2.90

* Tests whether expected returns across days of the year are equal based on regression equation (6).
The null hypothesis of equal returns is not rejected in all cases according to the time period. Time
period from 1987-7-28 to 2006-12-29 for NL, UK, US and Japan markets.

** Significant at the 5 percent level.

Prob (F > 2.92| n1 = 2, n2 = 5066) = 0.05

The F-statistics are computed for each regression according to the time period and results are
reported in Table 7a. In Table 7a, we test the equality of expected returns for each market for
the whole time period from 1987-7-28 to 2006-12-29. We use F-test critical value to evaluate
the significant level of the hypothesis, the F critical value at the 5% significance level is F0.05;
2, 5066=2.92. If F statistics are greater than this value, we reject the null hypothesis. The F
statistics for each market during the whole period are 0.45 for the Netherlands, 1.47 for UK,
0.61 for US and 2.90 for Japan, respectively (see Table 7a). Thus we cannot reject the null
hypothesis for all the markets.

32
Table 7b: Tests for Holiday Effects Using Market Indices (1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

The estimated coefficients and standard errors of the parameters stated in Equation (6) are
presented in Table 7b and this table shows the results for the entire time period (1987-7-28 to
2006-12-29). The results in Table 7b indicate that there is a significantly higher post-holiday
return in the Japanese market at the 5% significance level. The coefficient of post-holiday
return over the entire period in the Japanese market is 0.27 percent and the average returns on
all other days of the year are negative 0.01 percent. It suggests that post-holiday returns are
nearly 27 times higher than other days of the year in the Japanese market (by absolute value).

For several sub-period estimations, for instance, we found that there is a significantly higher
post-holiday return in the UK market at the 5% significance level during 1987-7-28 to
1990-12-31 (see Table 7c). From Table 7c, we can conclude that the coefficient of
post-holiday return over this certain time period in the UK market is 0.48 percent and the
average returns on all other days of the year are negative 0.03 percent. It suggests that the
post-holiday returns are nearly 16 times higher than other days of the year in the UK market
(by absolute value). In addition, we found that there is a significantly higher pre-holiday
return in the UK market at the 5% significance level during 1991-1-1 to 1995-12-29 (see
Table 7d). From Table 7d, we can conclude that the coefficient of pre-holiday return over this
certain time period in the UK market is 0.27 percent and the average returns on all other days
of the year are 0.03 percent. It suggests that pre-holiday returns are nearly 9 times higher than
other days of the year in the UK market.

33
Table 7c: Tests for Holiday Effects Using UK index (1987-7-28 to 1990-12-31).

Significant results at the 5 percent level are shown in bold.

Table 7d: Tests for Holiday Effects Using UK index (1991-1-1 to 1995-12-29).

Significant results at the 5 percent level are shown in bold.

Table 7e: Tests for Holiday Effect Using Newey-West Standard Errors for the US Index
(1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

As we detect that there is autocorrelation among time-series data for the US market, thus we
need to use Newey-West standard errors for hypothesis testing of holiday effect.

Results of the holiday effect for the US market using Newey-West standard errors are shown
in Table 7e. From Table 7e, we can safely conclude that there is no significant pre-holiday
and post-holiday effect at the 5% level for the US market comparing to the results shown in
Table 7b, however, we can get more efficient estimation of the residuals by using
Newey-West standard errors,.

4.2.3 Result analysis

Study by Cadsby and Ratner (1992) suggested that UK market (e.g., FTSE 100 from 1983 to
1988) does not exhibit a holiday effect. In contrast, our findings show that there is significant
pre-holiday effect during 1991-1-1 to 1995-12-29 and significant post-holiday effect during
1987-7-29 to 1990-12-31 in the UK market. Kim and Park (1984) found that the existing
holiday effects appear to be driven by local phenomena. In Nico’s study (2004), it showed

34
that there were abnormally high returns during the pre-Christmas period in the Netherlands
(e.g., AEX from 1981 to 1998). In our analysis, we do not find any significant holiday effects
(i.e., pre-holiday effect and post-holiday effect) in the Dutch market during the whole period
(1987-7-28 to 2006-12-29). The possible explanation might be due to different computing
method. In our study, we include all the national public holidays but not just for holidays
around Christmas, and the time length is much longer than the study mentioned above.

In the history of financial markets, Black Monday is the name given to Monday, 19th October
1987, when the Dow Jones Industrial Average (DJIA) dropped by 22.6%, and on which
similar enormous drops occurred across the world. And it was the largest one-day percentage
decline in the stock market history. Our data used here is from 1987-7-28, there are national
holidays right after 19th October in UK, and it might indicate that the returns before and after
holidays were negative, thus it is not accurately to say that pre-holiday returns should be
higher than average returns on other days of the year. Moreover, since our definition of the
national holidays is not very strict, we may count too many holidays or there is not a
standardized rule stating the standard holidays that we should include in the hypothesis testing
for each market.

4.3 Fiscal year effect

4.3.1 Empirical Methodology

Recall that the fiscal year effect refers to the phenomenon where stock returns of the tax
month on average are higher than in other months. Thus, in order to test for a fiscal year effect
for these four indices, we first checked the fiscal month of each country. As documented, the
tax month for most of the markets is January, and normally there is a January effect, so we
would expect that January indices’ returns on average are higher than in other months. In
contrast, for the UK market, the tax month is in April, thus we would expect that April
indices’ returns on average are higher than in other months. As a result, our regression model
and the interpretation of dummy variables will be adjusted accordingly.

In order to test for the fiscal year effect, we estimate a simple regression model for each
month of the week, where the regression equation is specified:

Rt= E(Rt) + εt. (7)

In the regression, Rt is the particular monthly return on indexes through different markets (e.g.,
AEX, FTSE 100, NASDAQ and NIKKEI 225 monthly returns for January, February... until
December). E(Rt) is the expected monthly return corresponding to which month we selected
as Rt.
35
Furthermore, we test the null hypothesis of equal expected returns for each month of the year.
To test the null hypothesis, we apply a multiple regression model, where the regression
equation is specified:

Rt = α1 + α2DFeb + α3DMar + α4DApr + α5DMay + α6DJun + α7DJul + α8DAug + α9DSep

+ α10DOct + α11DNov + α12DDec +εt , (8)

where Rt stands for the stock market return at time t, εt is a white noise error term. The
intercept α1 represents the mean return for the month in January, and coefficients α2 to α12 are
the average differences in return between January and each month.

The null hypothesis is α1=α2=...=α12=0, and the alternative hypothesis is not all the α-s are
equal. If the null hypothesis is rejected, we can conclude that there is a fiscal year effect
(January effect for the Netherlands, US and Japan markets, April effect for the UK market).

The model mentioned above is estimated for the Netherlands (i.e., AEX), United State (i.e.,
NASDAQ) and Japanese market (i.e., NIKKEI 225). Since for the UK market, the tax month
appears in April, we specify our model towards the UK market using April as reference
month. The following model for the UK market is specified:

Rt = α1 + α2DJan + α3DFeb + α4DMar + α5DMay + α6DJun + α7DJul + α8DAug + α9DSep

+ α10DOct + α11DNov + α12DDec +εt , (9)

where Rt stands for the stock market return at time t, εt is a white noise error term. The
intercept α1 represents mean return for the month of April, whereas the coefficients α2 to α12
are average return differences between April and each month.

4.3.2 Empirical Results

From Table 8a, we can conclude that there is a significant January effect of the US market at
the 5% significance level for the entire time period (July-1978 to December-2006). The
results indicated that the average January returns are significantly higher than the average
returns in the other months. However, we found a significant December effect in the Dutch
and UK market at the 5% significance level during the same period. Additionally, for the
Dutch market, there is a significant April effect at the 5% significance level. Finally, none of
the average monthly returns tend to be significant for the Japanese market. Our results
provide some consistencies with previous findings, where shows that January returns should

36
Table 8a: Average Monthly Return and T-test Using Market Indices (July-1987 to December -2006).

* Average return is monthly based.

* Standard error is monthly based.

* T-test: test statistic = Average return / standard error (monthly based).

Significant results at the 5 percent level are shown in bold.

37
Table 8b: Test for Equality of Mean Returns (July-1987 to December-2006).

Test for Equality of Mean Return

Across Months of the Year for Each Country*
Degress of Freedom F-Statistic
Country (n1, n2) (F)
NL 11, 222 1.36
UK 11, 222 0.74
USA 11, 222 0.70
JAP 11, 222 0.40

*Tests whether expected returns across month of the year are equal based on regression equation (8)
and equation (9). The null hypothesis of equal returns is not rejected in all cases according to the time
period. Time period from July-1987 to December-2006 for NL, UK, US and Japan markets.

** Significant at the 5 percent level.

Prob (F > 1.75| n1 = 11, n2 = 222) = 0.05

be significantly higher than other months. And we founded it in the US market. In contrast,
we should have found a significant higher average return in April for the UK market, since
the tax month in UK is April.

The F-statistics are computed for each regression according to the time period and results are
reported in Table 8b. In Table 8b, we test the equality of expected returns for each market for
the whole time period from July-1987 to December-2006. We use F-test critical value to
evaluate the significant level of the hypothesis, the F critical value at the 5% significance
level is F0.05; 11, 222=1.75. If F statistics are greater than this value, we reject the null hypothesis.
The F statistics for the four markets during the whole period are 1.36 for the Netherlands,
0.74 for UK, 0.70 for US and 0.40 for Japan, respectively (see Table 8b). Thus we cannot
reject the null hypothesis for all the markets.

Table 8c indicated significant differences between returns on January (e.g., January in case of
the Netherlands, US and Japanese market; April in case of the UK market) and returns on the
other months of the year for the entire time period. From this table, we can conclude that for
the Dutch market, the returns in January compared with returns in September yield significant
difference, as can be concluded by the p values and t statistic values in Table 8c. Additionally,
we found a significant January effect in the US market at the 5% significance level.

4.3.3 Result analysis

38
Table 8c: Tests for Fiscal year Effects Using Market Indices (July-1987 to December -2006).

Significant results at the 5 percent level are shown in bold

39
From the fiscal year effect analysis, it shows that there is a significant higher average January
return in the US market. And the significant December effect found in the UK market is not in
line with tax-selling hypothesis, where UK’s tax month is in April. In addition, the significant
April and December effects found in the Dutch market are not in line with previous findings.

Several years ago, Branch (1977) proposed a unique trading rule for those who are interested
in taking advantage of tax selling. Investors (individuals and institutions) tend to engage in
tax selling at the end of the year in order to establish losses on stocks that have declined. After
the New Year, they reacquire these stocks or buy other stocks that look attractive. This
scenario would produce downward pressure on stock prices in late November and December
and upward pressures on stock prices in the early January, since the demand for the stocks are
driven up. Such a seasonal pattern is inconsistent with efficient market hypotheses, since it
should be eliminated by arbitrageurs who would buy in December and sell in early January.

Several studies provide support for a January effect which is inconsistent with the tax-selling
hypothesis. For example, by examining what happened in countries outside the United States
where there is no tax laws or a December as the fiscal year-end. They found abnormal high
returns in January, but the results could not be explained by tax laws. As pointed out by Keim
(1986), despite numerous studies, the January anomaly poses as many questions as it answers.

5. Supplementary Empirical Tests

We tested the daily returns and monthly returns do not follow a normal distribution, thus our
results based on an OLS approach need to be adjusted for the purpose of statistical inference.
For instance, we might need to include a GARCH (1, 1) model if there is an ARCH effect. As
Engle (1982) argued that in the linear regression model, OLS is the appropriate procedure if
the disturbances are not conditionally heteroscedastic. And because the ARCH model requires
interactive procedures, it may be desirable to implement a Lagrange multiplier test procedure
before going to estimate an ARCH model. Hence, we will first test whether there is an ARCH
effect among daily residuals and monthly residuals and then estimate the regressions of
anomalies (i.e., the week day effect, the holiday effect and the fiscal year effect) in case we
find indications for GARCH effects. The ARCH LM test results of daily residuals are shown
in the Appendix D for the whole period. The null hypothesis that there is no ARCH effect is
rejected at the 5% significance level for all the markets from 1987-7-28 to 2006-12-29. Hence,
we can apply the GARCH (1, 1) model for each market index.

40
Table 9a: Tests for the Day-of-the-Week effect by GARCH (1, 1) Model Using Market Indices (1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

41
Table 9b: Tests for the Holiday effect by GARCH (1, 1) Model Using Market Indices
(1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

The (1, 1) in the GARCH (1, 1) refers to the presence of a first-order autoregressive GARCH
term and a first-order moving average ARCH term, where the model is specified:

σt2 = ω + α εt-12 + β σt-12 (10)

The results of the week day effect using a GARCH (1, 1) model are shown in Table 9a. From
Table 9a, we can conclude that there is a significant Monday effect at the 5% significance
level for the Dutch market (1987-7-28 to 2006-12-29). For the UK market, the returns on
Monday compared with returns on Wednesday and Friday, respectively, yield a significant
difference, as can be concluded from the z statistic values in Table 9a. For the US market, we
can conclude that the returns on Monday compared with returns on Wednesday, Thursday and
Friday, respectively, yield a significant difference at the 5% level. For the Japanese market,
we do not find a significant Monday effect comparing to the results by the linear model.

The results of the holiday effect using a GARCH (1, 1) model are shown in Table 9b. From
Table 9b, we can conclude that there is significant post holiday effect at the 5% significance
level for the Japanese market (1987-7-28 to 2006-12-29).

42
Table 9c: Tests for the Fiscal year effect by GARCH (1, 1) Model of AEX, NASDAQ and NIKKEI 225 Indices (1987-7-28 to 2006-12-29).

Significant results at the 5 percent level are shown in bold.

43
The ARCH LM test results of monthly returns are shown in the Appendix E for the whole
period. The null hypothesis that there is no ARCH effect is rejected at the 5% significance
level for the Netherlands, US and Japanese markets from 1987-7-28 to 2006-12-29. Hence,
we can apply the GARCH (1, 1) model furthermore for these three market indices only.

The results of the fiscal year effect using a GARCH (1, 1) model are shown in Table 9c. From
Table 9c, we can conclude that the for the US market, returns on January compared with
returns on March yield a significant difference at the 5% level (1987-7-28 to 2006-12-29).

6. Concluding Remarks

Various seasonal patterns in stock returns are examined for the Netherlands, UK, US and
Japanese market. We first did several pre-analysis, including normality check, stationarity
check and autocorrelation check. Then the regression methods are adjusted accordingly, for
example, we used Newey-West standard errors and GARCH (1, 1) model.

In general, the study of the weekend effect measured from Friday close to Monday close
shows that during the whole testing period from 1987-7-28 to 2006-12-29, average returns on
Monday in all the markets are negative, but the result is only statistically significant (at the
5% level) for the Japanese market. In addition, the result is relatively volatile within several
sub periods. For example, there is a significant Monday effect for the Dutch market during
1987-7-28 to 1990-12-31 and 1996-1-1 to 2000-12-31, for the UK and US market during
1987-7-28 to 1990-12-31, for the Japanese market during 1991-1-1 to 1995-12-29,
respectively (using linear model). Whereas, we found that there is a significant Monday effect
for the Dutch market during the entire period when using a GARCH (1, 1) model.

The study of the holiday effect shows that there is a significant post-holiday effect in the
Japanese market at the 5% level during the whole time period (both by linear model and
GARCH (1, 1) model). Additionally, there is a significant post-holiday effect in the UK
market during 1987-7-28 to 1990-12-31 and a significant pre-holiday effect during 1991-1-1
to 1995-12-29, respectively (using linear model).

The present analysis of the fiscal year effect shows that there is a significant January effect
under the assumption of the tax-selling hypothesis at the 5% level in the US market during
July-1987 to December-2006 (using linear model).

44
Although there are still several limitations of this paper, for instance, we do not take market
risks into consideration and we do not distinguish between small firms and large firms, we did
make several data adjustments and improved the regression model by applying different
techniques (i.e., Newey-West standard error; OLS; GARCH (1, 1)). Hence, we took a look
deeper in the data analysis and get better estimation of the coefficients and stand errors.
Thereby, we provide a comprehensive view on this empirical study for the global market
during certain period.

Further research should also take detailed data adjustment into consideration. In addition, the
detection of certain anomalies in the capital market, which might provide some degree of
evidence to violate EMH, should provide more consistent and direct empirical evidence on
the explanations of existing abnormal returns. Finally, it might be interesting to make analysis
from psychological perspective (e.g., investor’s sentiment), for example, when and why
investor’s sentiment might influence stock performance.

45
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48
Appendix A:

Table 1: Descriptive Statistic Table of AEX, FTSE 100, NASDAQ and NIKKEI 225
(July-1987 to December-2006).

NL(AEX) UK(FTSE100) USA(NASDAQ) JAPAN(NIKKEI 225)

Mean 0.005905 0.004157 0.006902 -0.001972
Median 0.013785 0.010154 0.013854 -0.001223
Maximum 0.140007 0.128857 0.208489 0.183513
Minimum -0.353381 -0.320019 -0.311778 -0.228789
Std. Dev. 0.062139 0.047954 0.070699 0.063641
Skewness -1.444612 -1.545497 -0.809767 -0.279993
Kurtosis 8.493944 11.63886 5.727189 3.611878

Jarque-Bera 367.6503 803.2567 95.99344 6.564461

Probability 0.000000 0.000000 0.000000 0.037544

Sum 1.352212 0.952008 1.580609 -0.451494

Sum Sq. Dev. 0.880359 0.524315 1.139619 0.923443

Observations 234 234 234 234

Appendix B:

Figure 1a: Histogram of AEX for the whole period (July-1987 to December-2006).

60
Series: RETURNNL
Sample 1 234
50
Observations 234

40 Mean 0.006189
Median 0.014157
30 Maximum 0.140007
Minimum -0.353381
Std. Dev. 0.061627
20 Skewness -1.461165
Kurtosis 8.619320
10
Jarque-Bera 391.1386
Probability 0.000000
0
-0.3 -0.2 -0.1 0.0 0.1

49
Figure 1b: Histogram of FTSE 100 for the whole period (July-1987 to December-2006).

70
Series: RETURNUK
60 Sample 1 234
Observations 234
50
Mean 0.004309
40 Median 0.010229
Maximum 0.128857
Minimum -0.320019
30
Std. Dev. 0.047539
Skewness -1.560694
20
Kurtosis 11.81252
10 Jarque-Bera 852.1854
Probability 0.000000
0
-0.3 -0.2 -0.1 -0.0 0.1

Figure 1c: Histogram of NASDAQ for the whole period (July-1987 to December-2006).

50
Series: RETURNUS
Sample 1 234
40 Observations 234

Mean 0.007431
30 Median 0.013995
Maximum 0.208489
Minimum -0.311778
20 Std. Dev. 0.070092
Skewness -0.832906
Kurtosis 5.827093
10
Jarque-Bera 104.9820
Probability 0.000000
0
-0.3 -0.2 -0.1 -0.0 0.1 0.2

50
Figure 1d: Histogram of NIKKEI 225 for the whole period (1987-7-28 to 2006-12-29).

50
Series: RETURNJAP
Sample 1 234
40 Observations 234

Mean -0.001462
30 Median 0.000395
Maximum 0.183513
Minimum -0.228789
20 Std. Dev. 0.063137
Skewness -0.300197
Kurtosis 3.661547
10
Jarque-Bera 7.781647
Probability 0.020429
0
-0.2 -0.1 -0.0 0.1 0.2

Appendix C:

Table 2a: Breusch-Godfrey Serial Correlation LM Test of AEX Index (July-1987 to

December-2006).

Table 2b: Breusch-Godfrey Serial Correlation LM Test of FTSE 100 Index (July-1987 to
December-2006).

Table 2c: Breusch-Godfrey Serial Correlation LM Test of NASDAQ Index (July-1987 to

December-2006).

51
Table 2d: Breusch-Godfrey Serial Correlation LM Test of NIKKEI 225 Index
(July-1987 to December-2006).

Appendix D:

Table 3a: ARCH LM Test for the Daily Residuals of AEX Index (1987-7-28 to
2006-12-29).

Table 3b: ARCH LM Test for the Daily Residuals of FTSE 100 Index (1987-7-28 to
2006-12-29).

Table 3c: ARCH LM Test for the Daily Residuals of NASDAQ Index (1987-7-28 to
2006-12-29).

Table 3d: ARCH LM Test for the Daily Residuals of NIKKEI 225 Index (1987-7-28 to
2006-12-29).

Appendix E:

52
Table 4a: ARCH LM Test for the Monthly Residuals of AEX Index (1987-7-28 to
2006-12-29).

Table 4b: ARCH LM Test for the Monthly Residuals of FTSE 100 Index (1987-7-28 to
2006-12-29).

Table 4c: ARCH LM Test for the Monthly Residuals of NASDAQ Index (1987-7-28 to
2006-12-29).

Table 4d: ARCH LM Test for the Monthly Residuals of NIKKEI 225 Index (1987-7-28
to 2006-12-29).

53