Testing time and calendar anomalies in Indian equity market

Abstract

Weak and semi- strong forms of inefficiencies have been found to exist even in developed market. Abnormal returns on a specific day, month or calendar event are one such example of inefficiencies. Researches have found exceptionally high returns in January and exceptionally low returns on Monday of every week. While the former is called the “January effect” the latter has been termed as “Weekend effect”, Over the years, varied reasons have been provided to explain various time and calendar anomalies. As far as the Indian market is concerned, it has seen huge reforms in last 10-15 years starting from formation of SEBI, rolling settlement system, online trading and dematerialization of scrips .Thus, this paper makes an attempt to find whether the Indian market has become efficient enough to get rid of “month of the year” and “day of the week” anomalies found in other markets. For testing “month of the year” effect, BSE 200 index was considered from 1995 to 2004, since it has been hypothesized that intensity of this effect depends on the size of the stock, the test was done on different size based portfolios of BSE 200 stocks. The results confirm that there are negative returns in the month of March which is the end of financial year and thus selling of loss making scrips to save tax can be the reason. However, the size effect does not seem to be evident in India as the small cap stocks have done better than large cap stocks in the month of March, quite contrary to general expectations. The month of December shows significant higher returns compared to other months. One possible explanation can be the extra capital flowing in the Indian capital market in December as the US markets remain close during that time. As far as the ‘day of the week’ effect is concerned it was tested using daily returns on the index NIFTY from 1995 to 2004. Analysis used GRACH technique and not only abnormal return but abnormal volatility on any particular day of the week was tested. It was found that in pre- badla period (prior to 2001), there had been higher returns on Wednesday due to the start of settlement cycle on Wednesday. However, now there are neither abnormal returns nor abnormal volatility in the Indian stock market since the abolishment of badla system.