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Impact Of Public Holiday On Stock Returns

4200 words - 17 pages

1.1 Background
Stock markets play a significant role in the wellbeing of an economy; thus efficient stock markets will positively affect the economy in a country. Concept of efficient markets was first coined by Fama(1970), describes an efficient market, as a market with fully available information to all investors, while at the same time stock prices fully reflect all the information available. Consequently, no individual investor will be able to reap profits above the average. Fama further describes the EMH in three form i.e. weak, semi-strong and strong form of efficiency.
In Weak form efficient market stock prices have a random movement. We cannot use ...view middle of the document...

And if seasonal anomalies persist in the market then market will be inefficient and investors will have arbitrage opportunity to gain abnormal returns (Lucy & Dowling, 2005). Investors have higher returns because they try to buy share before holidays (Brockman & Michayluk, 1998).

This paper is an effort to find out whether public holidays have any impact on KSE-100 returns. The rationale behind this is that investors will sell or buy stock when holiday is arriving. So stock prices will be affected. Data from January 2009 to November 2013 was gathered for the study holiday’s impact was checked using independent sample t-test. The results show that public holiday anomaly persists in Pakistan and investor can use this information to earn abnormal excess returns.

1.2 Research Statement
To determine the impact of public Holidays on KSE-100 returns

1.3 Objectives
To analyze Karachi stock exchange efficiency.
To check the holiday effect on KSE.
To check the persistence of holiday anomaly over the last 5 years.
To check whether pre holiday’s effect last for more than 1 to 2 days.

1.4 Significance
This study will help investor to understand the behavior of stock exchange towards public holidays. Whether to invest or not in KSE to get higher returns. Study will also help KSE regulators to understand market efficiency and if any corrective measures are needed should be implemented. On academic side this study will increase the literature regarding financial anomalies and specifically public holiday anomaly.


Market efficiency is the basic theory in behavioral finance. Efficient market is the market in which all information regarding stocks is available to the public, and is reflected in stock prices. In efficient market there is no arbitrage opportunity. This market efficiency is further classified into three categories. Weak form market efficiency, semi strong form and strong form of efficiency (Fama, 1991).
Stock market efficiency is highly studied topic since fama hypothesis. Stock market efficiency is affected when any news disturbs the stock market returns. Secondly there are anomalies in stock market which produce excess returns in certain periods. These anomalies are technical and calendar anomalies. In calendar anomalies some days, month or period have different returns than other days and months. These anomalies include January effect, weekend effect, turn of the month effect, and holiday effect (Schewart, 2002). These anomalies change the stock market efficiency because stock prices can now be predicted, and make it possible for certain investors to get higher returns. Like if day of the week effect persists in a market it will help certain investors to devise a selling strategy for the stocks on Friday and buy on Monday (Aggarwal & Tandon, 1994). Likewise in January effect, loser stocks are usually sold in December for tax adjustment and shares are bought again in start of...

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