Day-of-the-Week and Month-of-the-Year Effect on the Kenyan Stock Market Returns

Capital markets are normally assumed to be efficient in relation to the instantaneous incorporation of all known and new arriving information into prices of securities. Studies assessing the efficiency of capital markets have reported mixed results, some of which are against the efficient markets theory. The purpose of this study was to determine if daily and monthly seasonal anomalies do exist in the Kenyan stock market. Data on prices and adjusted returns derived from the NSE 20 index were analysed using regression analysis to identify the behaviour of stock investors in Kenya during 1980–2006. Results indicate that Monday produces the lowest negative returns, while Friday and January produce the largest positive returns. These results are useful in providing evidence of deviation from the efficient markets theory and in drawing conclusions about anomalies in an emerging stock market. Finding highest return volatility on Friday and lowest on Monday might be due to several economic news announcements released on Thursdays and Fridays, and is consistent with informed trader argument. The returns are therefore influenced by foreign portfolio investor behaviour and delays in receiving news released from foreign financial markets. Day-of-the-week effect and January effect patterns in return and volatility might enable investors to take advantage of relatively regular shifts in the market by designing trading strategies, which accounts for such predictable patterns.