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Stability of the day of the week effect in return and in volatility at the Indian capital market: a GARCH approach with proper mean specification

Listed author(s):
  • Kaushik Bhattacharya
  • Nityananda Sarkar
  • Debabrata Mukhopadhyay

This paper examines the stability of the day of the week effect in returns and volatility at the Indian capital market, covering the period January 1991-September 2000. The paper specifies a generalized autoregressive conditional heteroscedasticity (GARCH) model on returns and introduces separate dummies for days in alternate weeks in the specification of both the mean and the conditional variance to examine the robustness of the day of the week effect in return and in volatility within a fortnight. Results are compared to those based on ordinary least squares (OLS) procedure to examine how erroneous the inference on day-level seasonality could be when the aspect of volatility is ignored. The paper finds evidence in favour of significant positive returns on non-reporting Thursday and Friday, in sharp contrast to the finding of significant positive returns only on non-reporting Monday by OLS procedure. Separate subperiod analyses reveal that there have been changes in daily seasonality in both returns and volatility since the mid-1990s at the Indian capital market, manifested in the opposite signs and changes in the level of significance of some similar coefficients across periods. These findings on the day of the week effects along with its variation within a fortnight suggest that stock exchange regulations and the nature of interaction between the banking sector with the capital market could possibly throw valuable insights on the origin of the day of the week/fortnight effect in returns, while interexchange arbitrage opportunities due to differences in settlement period could lead to a seasonality in volatility.

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Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 13 (2003)
Issue (Month): 8 ()
Pages: 553-563

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Handle: RePEc:taf:apfiec:v:13:y:2003:i:8:p:553-563
DOI: 10.1080/0960310021000020924
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