Academic journal article International Management Review

The Day of the Week Anomaly in Bahrain's Stock Market

Academic journal article International Management Review

The Day of the Week Anomaly in Bahrain's Stock Market

Article excerpt

[Abstract] The objective of this study is to examine the existence and the conditional nature of one of the most recognized anomalies, known as "the day-of-the-week anomaly," that has jarred confidence in the conventional concepts of the efficient market hypothesis. A variety of statistical techniques - multiple regression analysis, Pearson correlation coefficient, and t-test - have been employed to investigate the presence and the nature of the week-end effect on the Bahraini Stock Exchange. The study concludes that there is credible evidence for demonstrating the existence of the day-of-the-week effect in trading conducted through the medium of the Bahraini Stock market (albeit that the Bahraini market exemplifies only weak form market efficiency). In addition, this study demonstrates with respect to the Bahrain Stock Exchange that there is a positive correlation between returns on the first trading day of the week and the last trading day of the week and that the first trading day's returns during the first half of the month exceeds that of the second half of the month.

[Keywords] Bahrain; stock market; the day-of-the-week-anomaly; market effect

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The day-of-the-week effect has attracted considerable academic attention since its discovery back in 1930. Since then, an ample number of studies have examined the effect of the phenomenon on trades conducted in major equity bourses such as the New York Stock Exchange and the London Stock Exchange. Some of these studies have identified abnormally low stock returns measured on the first trading day of the week as compared to the rest of the week days. Contrary to what would be expected from application of efficient market theory, the average daily return in stock markets is not the same for all the days of the week.

The Purpose and Objectives of the Study

The purpose of this study is to investigate the presence of the day-of-the-week effect in the Bahraini stock market over different periods of time and across companies of different sizes. This effect is of interest and great importance from a practical as well as from an academic point of view. If a calendar effect is prominent and systematic in the stock market, traders, speculators and portfolio managers can have useful clues regarding their investment decisions. Investors can also easily exploit such calendar effects to improve their returns by timing their investments. The study examines the daily stock returns of publicly traded companies listed on the Bahrain Stock Exchange to ascertain the correlation between the returns on the first trading day of the week and the last trading day of the week. The study also measures and compares first trading day returns in the first half of each month to the returns of the first trading day in the second half of the month.

Literature Review

"The concept of efficiency in economics is a general term for the value assigned to a situation by some measure designed to capture the amount of waste or friction or other undesirable economic features present "(Sewell, 2011). Within this context, an efficient market is a market in which information is rapidly dispersed and reflected in prices. The modem literature of Market Efficiency begins with Samuelson (1965). Nonetheless, Eugene Fama (1965) was the first to introduce the term Efficient Markets into the economics literature. He suggested that stock prices are unexpected and pursue a random walk. An empirical antecedent of the random walk theory, however, can be traced back to 1933 when Cowles (1933) published his article following the 1929 crash of the U.S. stock market. He concluded that the forecasting performance was nothing but pure chance.

The hypothesis of efficient markets captured the imagination of economists and financial scholars alike. Further studies explored the reaction of the stock market to announcement of various events, such as earnings (Ball & Brown, 1968), stock splits (Fama, 1990), and capital expenditure (McConnell & Muscarella, 1985). …

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