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A factor model of seasonality in stock returns

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  • Gardeazabal, Javier
  • Regúlez Castillo, Marta

Abstract

Most empirical evidence on stock market seasonality is based on the Dummy Variable Approach (DVA). Typically, the DVA leaves too much variability of stock returns unexplained and inference usually leads to weak or null evidence in favor of seasonality. In this paper, we propose an extended DVA (EDVA) which leaves a lower fraction of stock return variability unexplained. We provide empirical evidence on daily seasonality in the Spanish stock market. Inference based on the EDVA finds positive and significant Monday and Friday effects and negative and significant Wednesday and Thursday effects. Extending the analysis to a model with GARCH conditional variances confirms these results and shows heavy daily seasonality in conditional variances.

Suggested Citation

  • Gardeazabal, Javier & Regúlez Castillo, Marta, 2002. "A factor model of seasonality in stock returns," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    • Handle: RePEc:ehu:dfaeii:6806
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    References listed on IDEAS

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    1. Peiro, Amado, 1994. "Daily seasonality in stock returns : Further international evidence," Economics Letters, Elsevier, vol. 45(2), pages 227-232, June.
    2. French, Kenneth R., 1980. "Stock returns and the weekend effect," Journal of Financial Economics, Elsevier, vol. 8(1), pages 55-69, March.
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    4. Chien, Chin-Chen & Lee, Cheng-few & Wang, Andrew M. L., 2002. "A note on stock market seasonality: The impact of stock price volatility on the application of dummy variable regression model," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 155-162.
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    Cited by:

    1. Jorge Brusa & Wayne Lee & Pu Liu, 2011. "Monday returns and asset pricing," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(3), pages 332-347, July.
    2. Henry Aray, 2010. "Effects Of Macroeconomic Announcements On Stock Returns Across Volatility Regimes," World Scientific Book Chapters, in: Damianos P Sakas & Nikolaos Konstantopoulos (ed.), Marketing And Management Sciences, chapter 14, pages 76-80, World Scientific Publishing Co. Pte. Ltd..

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    More about this item

    Keywords

    stock returns; daily seasonality; common risk factors;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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