The Monthly Effect in Stock Returns and Conditional Heteroscedasticity
Journal article by Menahem Rosenberg; American Economist, Vol. 48, 2004
Journal Article Excerpt
The Monthly Effect in Stock Returns and Conditional Heteroscedasticity. by Menahem Rosenberg I. Introduction Various seasonal anomalies in stock returns have been researched since Rozeff and Kinney (1976) originally presented the January effect. (1) For example, French (1980) documented the weekend (or Monday) effect, (2) and Ariel (1987) presented the end-of-month (or monthly) effect. In addition, documentation of similar phenomena by Lakonishok and Smidt (1988) using a longer time series and by Jaffe and Westerfield (1985) in foreign equity markets has reduced the possibility that these anomalies are due to sampling error. In this paper, we present a possible structural explanation for Ariel's end-of-month effect. Ariel (1987) reports a higher cumulative return for the first-half of the month than the last-half of the month. Lakonishok and Smidt (1988) confirm this finding using an extended daily time series. In contrast, Wang, Li, and Erickson (1997) show that Mondays in the last two weeks of the month are responsible for the previously reported end-of-month effect. After controlling for Mondays in the last two weeks of the month, they find the coefficient for the end of the month to be insignificant. In other words, the end-of-month anomaly is explained as a weekend anomaly. Most of the research cited above uses daily stock returns data. However, French, Schwert, and Stambaugh (1987) suggest that the daily returns on the S&P 500 index exhibit conditional heteroscedasticity, while Engle and Mustafa (1992) show similar characteristics in individual stock returns. Moreover, Connolly (1989) tests the weekend effect in S&P 500 index returns and rejects the constant variance model in favor of a Generalized Autoregressi... |
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