Efficient Market Hypothesis and Market Anomaly

Topics: Stock market, Stock exchange, Fundamental analysis Pages: 29 (4902 words) Published: January 21, 2014
International Journal of Economics and Finance

Vol. 2, No. 2; May 2010

Efficient Market Hypothesis and Market Anomaly: Evidence
from Day-of-the Week Effect of Malaysian Exchange
Nik Maheran Nik Muhammad & Nik Muhd Naziman Abd. Rahman
Faculty of Business Management, Universiti Teknologi Mara, Kelantan Kampus Kota Bharu, 15150, Kota Bharu, Kelantan Malaysia
Tel: 60-12-966-5402

E-mail: nmaheran@kelantan.uitm.edu.my

The movements of prices in the stock market are among a few phenomena that have cut across the boundaries of academic disciplines and have cumulative research evidence spanning almost a century. Today the field of financial market research seems to be at the exciting stage of “crisis” – past results are being questioned, and new solutions are being proposed. The preliminary evidence indicates that the initial confidence in the Efficient Market Hypothesis (EMH) might have been misplaced. Various anomalies and inconsistent results make EMH fail to depict trading operations in real world. The presence of calendar anomalies has been documented extensively for the last two decades in financial markets. However, for the Malaysian market, empirical analyses on the market anomaly were limited and contradicting. Some studies indicated market anomalies exist and some indicated non-exist. Hence, the present study was trying to sought for the answer of following questions: Is the return on common stocks usually distributed, as much as finance theory assumes? How has the volatility of stock returns changed over time? How is the distribution of returns affected by past returns? Generally, it was found that, day of the week-effect exist in Malaysian Exchange but only for the Monday effect. Keywords: Efficient Market Hypothesis, Market Anomaly, Day of the week effect 1. Introduction

The distribution of returns on common stocks is one of the
most widely studied in the financial market and
the presence of calendar anomalies has been documented extensively for the last two decades. The most common ones are the day-of-the week effect and the January effect. Many studies (e.g. Aggarwal and Rivoli 1989; Cross 1973; French 1980; Keim and Stambaugh, 1984; Rogalski, 1984) has documented that the distribution of stock return varied according to the day of the week. For the Malaysian market, empirical analyses on the day-of-the week effect were limited and contradicting. Study by Wong et al. (1992) noted that the day-of-the week effect for Malaysian markets showed negative average returns on Monday and high positive returns on Thursday and Friday. Analyses by Anuar and Shamser (1993) and Mansor (1997) substantiated the presence of the day-of-the week effect found by Wong et al. (1992). However, it contradicting with other studies of Marashdeh (1994) as he concluded that there was no week effect in the Malaysian stock market in his sample of study. Substantial evidence supporting the Efficient Market Hypothesis (EMH) also has been documented over the years. EMH states that security prices fully reflect all available information and will immediately adjust to the arrival of new information (Adam, 2004). However, since market was closed on both Saturday and Sunday, it was argued that investors cannot do anything with the market even though they got some information during the weekend. There is where the anomalies exist.

The main idea for this study is to investigate whether the information processed over weekends will affect the index return of Kuala Lumpur (i.e. Composite Index (KLCI) at and after the opening on Monday). This study relates the elements of efficient market hypothesis (EMH) and market anomaly. Thus, the study tried to figure out whether the day-of-the week effect really exists in Kuala Lumpur Composite Index. The objectives of the present study was (1) to analyze empirically whether the day of the week effect exist in Kuala Lumpur Composite Index; and (2) To examine whether differences of the effect...

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Table 1. Summary statistic for daily index of KLCI (n=2085)
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