Essays in Seasonal Anomalies and Market Efficiency

This research proposal presents three studies related to presence of seasonal anomalies in European emerging markets. The first topic investigates the persistence of two seasonal anomalies, the day of the week effect and the January effect, in 18 European emerging markets, before, during and after the Global financial crisis. This paper would highlight the impact of the Global financial crisis on the presence of the two seasonal anomalies mentioned for each market. The second and third papers explore the effect of changes in liquidity and volatility on the presence of the day-of-the-week effect and the January effect prior, during and following the financial crisis. Seasonal anomalies are expected to persist in emerging markets, while they have been found to disappear in developed markets. This is due to emerging markets being less efficient than developed markets. Furthermore, as illiquidity and volatility promote inefficiency, seasonal anomalies are expected to be present in more illiquid and more volatile emerging markets. Studying the persistence of seasonal anomalies will provide important implications to both domestic and international investors for developing investment strategies. Moreover, studying the impact of the financial crisis on seasonal anomalies will be useful to policy makers, for adjusting current policies and for implementing new policies in response to future crisis. Finally, assessing the level of efficiency in emerging markets benefits international organizations and foreign governments interested in the development of capital markets in the emerging countries.

In the first paper, I propose to examine the persistence of two seasonal anomalies, the day-of-the-week effect and the January effect, in 18 European emerging markets, from 2002-2014. I plan to investigate the impact of the Global financial crisis of 2008 on the persistence of these two anomalies by analyzing the 2007-2009 period as well as the short-term (1 year) and long-term (5 years) periods before and after the financial crisis. This time frame of one year and five years is used to examine whether any potential deviations in the market efficiency are caused by a temporary shock from the crisis or by a long-term shift in the efficiency level. In my analysis, I plan to use daily and monthly data on stock index returns. The data for these 18 stock indexes will be collected through the Thomson Reuters Datastream. To test for the presence of January effect and day-of-the-week effect on both returns and volatility in each market for each period mentioned, I anticipate using two estimation models: ordinary least squares (OLS) regression model (1) used by Coutts and Sheikh (2000), and the GARCH model (2) proposed by Engle (1982) and further developed by Bollerslev (1986), the latter being used to capture the time-varying volatility of the stock returns. The second and third papers will focus on two characteristics of emerging markets, liquidity and volatility, which account for the changing patterns of seasonal anomalies in relation to the Global financial crisis. As lower liquidity and higher volatility promote inefficiency (Chordia, Roll and Subrahmanyam, 2008), it would be interesting to study the effect of these market characteristics on seasonal anomalies. The second paper will test the effect of liquidity on the day-of-the-week anomaly and the January anomaly during and outside the financial crisis period for the 18 emerging markets examined in the first paper. The third paper examines the impact of volatility on the day-of-the-week anomaly and on the January anomaly during and outside of the financial crisis period for the 18 emerging markets.