Calendar Anomalies in Nepalese Capital Market

Abstract

Efficient market is a market in which prices always fully reflect available information. Capital market efficiency is tested to identify whether the market is efficient at strong form, semi-strong form or weak form. This study has examined the market efficiency of the Nepalese capital market at weak form. Existence of anomalies make the market inefficient. Calendar anomalies are identified and examined in this study. This study focuses on the day-of-the-week anomaly, the month-of-the-year anomaly, and Holiday (Dashain) anomalies. Since, previous studies were conducted by using Ordinary Least Square (OLS) or Non-parametric and Parametric tests, this study had used GARCH (1,1) model. The GARCH (1,1) is an autoregressive conditional heteroscedastic model which is preferred over OLS to analyze time series data in the presence of heteroscedasticity in data and data clustering. The main objective of this study is to examine the presence of calendar anomalies in the context of Nepalese stock market. For this study the NEPSE Index and Sensitive Index are undertaken. The secondary data (NEPSE Index and Sensitive Index) are collected from the official website of NEPSE. The primary data are collected by personal face to face communication method. Daily log returns are calculated and descriptive statistics are calculated. To test the presence of the anomalies GARCH (1,1) model is used. The day-of-the-week effect is studied for the entire data set, by splitting the data into two halves and by identifying the bullish and bearish trend of the market. Month of the year effect is studied for the entire period and by splitting the data into two halves. The study has revealed that in Nepalese stock market is inefficient at weak level. Specifically, the study has revealed that the returns on Thursday are significantly higher than rest of the days for both NEPSE and Sensitive Index. The return on Ashad are significantly higher than rest of the months. No evidences of holiday effect are found from the study. It indicates that investors can develop their investment strategy to derive above average return from the market. In sum, the Nepalese stock market is found inefficient at weak level. The calendar anomalies such as day-of-the-week, month-of-the-year are present in the market. So, the investors can utilize the findings of technical analysis to form the strategy in order to attain abnormal returns.