Academic journal article Journal of International Business Research

The Day-of-the-Week Effect on the Santiago Stock Exchange of Chile

Academic journal article Journal of International Business Research

The Day-of-the-Week Effect on the Santiago Stock Exchange of Chile

Article excerpt

ABSTRACT

This empirical investigation examines the daily return data on the market index, IPSA, of the Santiago Stock Exchange of Chile to ascertain the presence of the day-of-the-week effect. The study utilizes the recent 68-month period from January, 2003 through August, 2008. During this period, the Chilean stock market gained almost 190 percent. Studies of equity markets around the world, both, developed and developing markets, have suggested that the market returns tend to depend on the day of the week itself. Most often such an effect has been found because of the significantly negative returns on Mondays and a diametrically opposite evidence for Fridays. Some recent studies however have questioned the continuing presence of such an effect in the U.S as well as in a few other national markets. To determine the presence of this anomalous effect, this study relies on the GARCH methodology. The findings indicate a persistent presence of the day-of-the-week effect in the Chilean market throughout the study period. However, our results are sample period specific. While in the first sub-period, the said effect was caused by the traditional Monday-Friday pattern, in the second sub-period, the anomalous effect was attributable to the significantly positive Wednesday returns. Moreover, this study finds that the daily returns on the Santiago Stock Exchange are far more dependent on the previous day's returns than on the day of the week.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Finance literature offers extensive evidence of the day-of-the-week effect in both, developed and developing markets. The Monday returns for the equity markets have been found to be the lowest of the week and often negative. Simultaneously, the Friday returns have been documented to be the highest of the week. Several recent studies have questioned the day-of-theweek effect results uncovered by relying on the OLS methodology (see for example, Connolly (1989), Chang, et al. (1993) and Dubois and Louvet (1996)). And yet, the use of the more robust econometric techniques has not always led to disputing the OLS method based findings regarding the presence of the anomalous effect. For example, while Alexakis and Xanthakis (1995) and Kamath, et al. (1998) have reported that the evidence on the anomalous effect in their studies was methodology independent, the Chen, et al. (2001) paper concluded that their findings were both, the estimation methodology specific as well as the sample period specific.

The objectives of this study are to determine if there is evidence of the day-of-the-week effect on the emerging equity markets of Chile and to ascertain if the findings on "the effect" are sample period specific. Bollerslev's GARCH methodology is utilized in this study of the Santiago Stock Exchange of Chile. To meet the stated objectives, we utilize the daily data of the Selective Stock Price Index, IPSA (Indice de Precios Selectivo de Acciones) over the most recent 68 -month period from January, 2003 through August, 2008.

PREVIOUS RESEARCH

Numerous studies of seasonal anomalies in the equity markets can be found in finance literature. The empirical evidence on the presence of the day-of-the-week effect occupies a central role in these studies. The well known articles by French (1980), Gibbons and Hess (1981), Keim and Stambaugh (1984), among others have indicated that the market returns tend to be dependent on the day of the week. Lakonishok and Smidt (1988) found that such an anomalous effect was present in the Dow Jones dating back to 1897. In an overwhelming majority of the older studies, the OLS methodology was utilized to detect :the effect. Connoly (1989) was one of the first researchers who argued that the return distributional characteristics of stock markets did not advocate the use of the OLS method. Connolly's findings suggested that the intensity of the day-of-the-week effect had weakened considerably after 1975. …

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