An analysis of day-of-the-week effects in the Egyptian stock market.
Aly, Hassan ; Mehdian, Seyed ; Perry, Mark J. 等
ABSTRACT
This study investigates daily stock market anomalies in the
Egyptian stock market using its major stock index, the Capital Market
Authority Index (CMA), to shed some light on the degree of market
efficiency in an emerging capital market with a four-day trading week.
The results indicate that Monday returns in the Egyptian stock market
are positive and significant on average, but are not significantly
different from returns of the rest of the week. Thus, no evidence was
uncovered to support any daily seasonal patterns in the Egyptian stock
market, indicating that stock market returns are consistent with the
weak form of market efficiency. These results should be interpreted with
caution since the Egyptian stock market has only a limited number of
stocks that are actively traded.
JEL: G150, G140, O530
Keywords: Egyptian stock market; Monday effect; Efficient market
hypothesis
I. INTRODUCTION
A large number of studies have documented a day-of-the-week effect
and other seasonal anomalies in asset returns in U.S. financial markets.
One of these anomalies is the Monday seasonal effect, which typically
occurs when asset returns are lower or negative on Mondays relative to
other days of the week (see for example French (1980), Gibbons and Hess
(1981), Lakonishok and Levi (1982), Smirlock and Starks (1986),
Lakonishok and Smidt (1988), Wang, Li and Erickson (1997), Kamara (1997)
and Mehdian and Perry (2001)). There are also studies that support the
presence of stock return anomalies in international asset markets (see
Gultekin and Gultekin (1983), Kim (1989), Jaffe, Westerfield and Ma
(1989), Solnik and Basquest (1990), Dubois and Louvet (1996) and Mehdian
and Perry (1999)).
The evidence of equity market anomalies contradicts the prediction
of the efficient market hypothesis (EMH), at least in its weak form,
because the predictable movements in asset prices provide investors with
opportunities to generate abnormal returns. In addition, stock market
anomalies may result from an inefficient flow of information in
financial markets, which is a violation of an underlying assumption of
the EMH.
While seasonal effects in advanced equity markets have been
investigated extensively, emerging markets have received less attention.
In emerging markets, it is possible that the dissemination of
information is restricted due to the possible manipulation of financial
information by market participants and a lack of strict disclosure
requirements imposed by the stock market regulatory agencies. We
therefore focus on the stock market in Egypt to test for daily stock
market anomalies in a typical emerging market. The Egyptian case is also
interesting because it operates on a four-day per week trading cycle, in
contrast to the more traditional five-day cycle of developed equity
markets.
The objective of this paper is to investigate daily stock market
anomalies in the Egyptian stock market using its major stock index, the
Capital Market Authority Index (CMA), to shed some light on the degree
of market efficiency in an emerging capital market. We examine daily
stock market returns from April 26, 1998 to June 6, 2001, the period
over which Egyptian equities were consistently traded on a four-day per
week basis. The results of the paper indicate that Monday returns in the
Egyptian stock market are positive and significant, but are not
significantly different from returns of the rest of the week. We uncover
no evidence to support the presence of any daily seasonal patterns in
the Egyptian stock market, indicating that stock market returns there
are consistent with the weak form of market efficiency. The rest of the
paper is organized as follows. Section II provides an overview of the
Egyptian stock market. The data and methodology employed are described
in Section III, and Section IV presents the empirical results. Finally,
Section V contains a summary and conclusion.
II. AN OVERVIEW OF THE EGYPTIAN STOCK MARKET
Egypt has a long and rich history of financial markets. By the late
1800s, Egypt had a sophisticated financial structure including a mature
stock exchange in both Alexandria and Cairo (Wilson, 1995). The Egyptian
stock market has experienced fundamental changes during four major
periods from 1888-1958, 1959-1971, 1972-1992, and 1992-present. In the
earliest phase, the market was active and growing at a remarkable rate.
By the 1940s, both the Cairo and Alexandria exchanges were very active,
and the combined Egyptian Stock Exchange ranked fifth in the world in
terms of overall market capitalization. However, in the second period
from 1959-1971, the Egyptian stock market was seriously marginalized by
government intervention and restrictions that left it effectively
inoperable (MohieEldin and Sourial, 2000). In the third period
(1972-1992), serious attempts were made to revive the failing stock
market to no avail, and the stock exchange continued to stagnate.
Finally, in the 1990s (the fourth period), the Egyptian stock market
went through a significant revival due to government liberalization policies. The restructuring of financial markets and privatization programs were key elements in stimulating economic development and
capital investment in the 1990s.
Major changes in the organization of the Egyptian stock exchanges
took place in January 1997 that significantly reformed the stock market.
Today, the stock market once again encompasses the two exchanges at
Cairo and Alexandria, both of which are governed by the same regulatory
agency, and share a common trading, clearing and settlement system.
Several important steps have been taken by the Egyptian government to
modernize the stock exchanges. For example, a coherent organization
structure with a clear division of authority and responsibilities has
been created, a new state-of-the-art trading, clearing and settlement
system conforming to international standards has been installed, new
membership and trading rules have been legislated, and new arbitration
and dispute resolution procedures were developed.
The Capital Market Authority (CMA) was established in 1990s, as the
primary regulatory body for the Egyptian stock exchange and it is
responsible for the issuance of licenses to all financial intermediaries including the Central Clearing and Depository Company. The CMA is also
responsible for the introduction and revision of any laws and
regulations pertaining to the efficiency and transparency of the market.
The company Misr Central Clearing and Depository (MCSD) oversees the
clearing and settlement of all securities transactions. MCSD is a
private company whose primary shareholders are 16 banks, 15 brokerage
houses and the stock market exchange itself. Together with the CMA,
these two agencies work to guarantee that the market functions
efficiently and transparently.
The market capitalization of the Egyptian stock exchange has grown
by an average of 40% per year since the 1997 reforms, reaching $36.7
billion by May 2001. Egypt's recent economic reform, mainly the
successful implementation of a large privatization program, is often
cited as being largely responsible for the rapid growth in Egyptian
stock market activities over the last five years. After the early
momentum provided by modernization of the exchanges, privately owned
companies are now the most active participants in primary and secondary
stock offerings. Of the 1,071 companies listed as of March 2001, over 90
are actively traded. More than 400 companies are classified as closed
family corporations, which are listed to qualify for certain tax
benefits (AMF, 2001).
The overall performance of the Egyptian stock market is measured by
the Capital Market Authority (CMA) Index, which covers all listed
companies and is calculated and released daily by the CMA. The Egyptian
stock market has been included in the International Finance
Corporation's composite stock index since January 1997, with a 1 %
weighting in the overall index. Furthermore, Morgan Stanley Capital
International covers the Egyptian stock market on a standalone basis,
although it has not yet included Egypt in its benchmark emerging markets
index. See Table 1 for more details and summary statistics.
III. DATA AND METHODOLOGY
The data set used in this paper consists of daily closing values
for the major Egyptian stock market index, the CMA Index, from April 26,
1998 to June 6, 2001. Prior to April 1998, stock trading in Egypt took
place from Monday to Thursday, and also occasionally on certain Fridays
and Sundays, resulting in an irregular pattern of four-day, five-day and
six-day trading weeks. The inception date of the sample period was
selected here to coincide with the time period when a consistent
four-day trading week (Monday through Thursday) was established in April
1998. The daily return for the CMA Index is computed as follows:
[R.sub.t] = log ([I.sub.t] / [I.sub.t-1]) x 100 (1)
where [R.sub.t] is the daily percentage return on the CMA Index on
day t, It and [I.sub.t-1], are closing values of the stock index on days
t and t-1 respectively. Panel B of Table 1 displays summary statistics
for the Egyptian stock returns calculated using equation (1). To first
investigate the day of the week effect we estimate the following
regression equation:
[R.sub.t]= [[beta].sub.1][D.sub.1] + [[beta].sub.2][D.sub.2] +
[[beta].sub.3][D.sub.3] + [[beta].sub.4][D.sub.4] + [[epsilon].sub.t]
(2)
where [R.sub.t] is the daily return as defined earlier, [D.sub.1]
through [D.sub.4] are dummy variables such that if t is a Monday, then
[D.sub.1]=1 and [D.sub.1] =0 for all other days, if t is a Tuesday
[D.sub.2] =1 and [D.sub.2] = 0 for all other days, and so forth;
[[epsilon].sub.t] is a random term and [[beta].sub.1]-[[beta].sub.4] are
coefficients to be estimated using ordinary least squares (OLS). If the
Egyptian stock market exhibits a traditional Monday effect, then a) the
estimated coefficient [[beta].sub.1] is expected to be negative and
statistically significant and b) Monday returns should also be
significantly less than returns during the rest of the week.
IV. EMPIRICAL RESULTS
Equation (2) is estimated for the CMA Index using Ordinary Least
Squares and the estimated parameters and related statistics are
presented in Table 2. A Chow test indicates that the estimated
coefficients reported in Table 2 are structurally stable over the entire
sample period. Note that the estimated coefficient for Monday returns is
positive and statistically significant (5% level), indicating a positive
mean return for Mondays in the Egyptian equity market. This is
inconsistent with the results reported in the finance literature for a
large number of countries, where significantly lower or negative Monday
returns are reported (the traditional Monday effect). Note also that the
other coefficients in Table 2 are all positive but none are
statistically different from zero.
In order to further investigate the presence of a positive Monday
seasonality in the Egyptian equity market, we perform a
difference-of-means test of the null hypothesis that the mean return on
Monday is equal to the mean return during the rest of the week. As can
be seen in Table 3, the difference-of-means test is not statistically
significant, indicating that Monday returns are significantly positive,
but are not significantly different from the returns during the rest of
the week. Therefore, the empirical results do not provide evidence that
there is a significant Monday effect in the Egyptian stock market.
In addition, we note that the standard deviation of Monday returns
(1.0606) is higher than the standard deviation during the rest of the
week (.6426), and a difference-of-variance test shows that the
difference is statistically significant. The significantly positive
Monday returns for the CMA Index are consistent with the fact that
Monday returns are significantly more volatile than returns during the
rest of the week. Taken together, the results in Tables 2 and 3 indicate
that a) the Monday effect, to the extent that it exists in the Egyptian
stock market, should not be considered a stock market anomaly and b)
Egyptian stock market returns are consistent with the weak form of the
EMH.
Following the intra-month approach of Wang, Li and Erickson (1997),
we further examine the nature of significantly positive Monday returns
in the Egyptian equity market. Specifically, we investigate whether the
positive Monday returns are caused by returns in the fourth and fifth
weeks of the month, as Wang, Li and Erickson find in the U.S. stock
market. In order to achieve this, Monday returns are first sorted by the
five weeks of the month. We then divide the returns into Monday returns
during the first three weeks of the month and Monday returns during the
last two weeks of the month, and perform a difference-of-means test of
the null hypothesis that Monday returns are equal in the two separate
intra-month periods. The results of this investigation are presented in
Table 4. As can be seen, the mean return during the first three weeks is
higher than the mean return during the last two weeks, but this
difference is not statistically significant (t-statistic = 1.17). These
results suggest that the significantly positive Monday returns for the
CMA Index are not caused by the returns during the last two weeks of the
month, as Wang et al. find for the U.S. market, providing further
evidence of at least a weak-form efficient stock market in Egypt.
V. SUMMARY AND CONCLUSIONS
In this paper we examine daily returns for the CMA Index from
1998-2001 to test for the Monday effect in the Egyptian equity market.
The Egyptian stock market provides a unique opportunity to test for
seasonal anomalies in an emerging and recently modernized stock exchange
where trading takes place on a four-day week basis (Monday through
Thursday) as opposed to the more traditional five-day week. The
empirical results indicate that while Monday stock returns are
significantly positive, they are not significantly different from
returns during the rest of the week. Furthermore, Monday returns are
significantly more volatile than returns from Tuesday to Thursday.
Hence, the significantly positive returns on Monday are associated with
returns that are more risky.
In addition, an intra-month return analysis provides evidence to
indicate that the significantly positive Monday returns are not caused
by higher returns during the last two weeks of the month, as Wang, Li
and Erickson have found for the U.S. stock market. The overall
implication of this study suggests that the emerging Egyptian market is
at least weakly efficient. Therefore, no specific trading rule can be
exploited to generate abnormal stock returns in the Egyptian stock
market.
Finally, it is important to note that Egypt, like other emerging
equity markets has an immature capital market. Thus, the results
presented here should be interpreted cautiously since the Egyptian stock
market has a limited number (about 100) of stocks that are actively
traded among the 1,071 listed stocks.
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Hassan Aly (a), Seyed Mehdian (b), and Mark J. Perry (b)
(a) Ohio State University, Aly.l@osu.edu
(b) University of Michigan-Flint, seyed@flint.umich.edu
(b) University of Michigan Flint, mjperry@flint.umich.edu
Table 1
Summary statistics for the Egyptian stock returns and CMA Index
Panel A
1994 1995
Market 4.3 8.1
Capitalization ($b)
Market 8% 13%
Capitalization
(% of GDP)
Number of listed 700 746
shares
Annual Trading 741.2 1,115.8
Value ($m)
Annual Volume of 29.3 43.7
Listed Trading
(Millions of shares)
Egyptian Stock 238.4 213.2
Exchange Index
1996 1997
Market 14.2 20.9
Capitalization ($b)
Market 21% 27%
Capitalization
(% of GDP)
Number of listed 649 654
shares
Annual Trading 3,179.0 7,020.2
Value ($m)
Annual Volume of 170.5 286.7
Listed Trading
(Millions of shares)
Egyptian Stock 296.7 359.9
Exchange Index
1998 1999 2000
Market 23.8 32.6 30.8
Capitalization ($b)
Market 28% 36% 31%
Capitalization
(% of GDP)
Number of listed 874 1,033 1,076
shares
Annual Trading 6,772.2 11,329.3 10,674.1
Value ($m)
Annual Volume of 440.3 841.1 952.7
Listed Trading
(Millions of shares)
Egyptian Stock 382.8 624.5 626.16
Exchange Index
(Source; Cairo & Alex Stock Exchange Statistical Bulletin,
CMA, Reuters), and published in
http://www.sigma-cap.com/wwwhome2/ese.htm
Panel B. Summary Statistics for Daily Returns from April 1998 to June
2001
Sample Period April 26, 1998 to June 6, 2001
Observations 620
Mean Return .07425
Median Return .03382
Maximum Return 3.2405
Minimum Return -2.6099
Standard Deviation 0.7620
Skewness 0.4482
Kurtosis 4.6117
Standard Deviation 0.7620
Table 2
OLS results for day-of-the-week effects
Variable Coefficient Std. Error
Monday .1394 .0626
Tuesday .0106 .0612
Wednesday .0913 .0608
Thursday .0599 .0608
t-Statistic Probability
Monday 2.2244 .026
Tuesday .1739 .861
Wednesday 1.5011 .133
Thursday .9851 .325
Chow Test for Structural Stability
Breakpoint October 26, 1999
F-test .387
Probability .817
Table 3
Monday returns versus returns during the rest of the week
Mean Standard Dev.
Returns on Monday .1394 1.0606
Returns during Rest of Week .0542 .6426
Difference of Means Test .92
Difference of Variance Test 2.72 ***
Table 4
Monday returns by week of the month
First 3 weeks Last 2 weeks Difference in two
Periods
Mean .2327 .0266 t-stat = 1.17
Standard Dev. 1.0472 1.0735