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The day-of-the-week effect and conditional volatility: Sensitivity of error distributional assumptions

  • Baker, H. Kent
  • Rahman, Abdul
  • Saadi, Samir

We test for reliable evidence of the day-of-the-week effect on both the mean and volatility for the S&P/TSX Canadian return index. Unlike previous studies, we permit several specifications for the error distribution -- GARCH normal, Student's t, generalized error distribution, and double exponential distribution. Unlike other studies, we find that the day-of-the-week effect in both mean and conditional volatility is sensitive to the particular specification of the underlying distributions. We also find that using a regression analysis assuming a Student's t distribution is a better way to investigate this effect. Our evidence demonstrates the apparent fragility of previous empirical studies on calendar anomalies. Thus, our results serve as a warning that with financial data, the error distributional assumptions are critical to correctly identifying empirical regularities in the data.

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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 17 (2008)
Issue (Month): 4 (December)
Pages: 280-295

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Handle: RePEc:eee:revfin:v:17:y:2008:i:4:p:280-295
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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