The Day-of-the-Week Effect on the Santiago Stock Exchange of Chile (2011)

ABSTRACT This empirical investigation examines daily return data on market index, IPSA, of Santiago Stock Exchange of Chile to ascertain presence of day-of-the-week effect. The study utilizes recent 68-month period from January, 2003 through August, 2008. During this period, Chilean stock market gained almost 190 percent. Studies of equity markets around world, both, developed and developing markets, have suggested that market returns tend to depend on day of week itself. Most often such an has been found because of significantly negative returns on Mondays and a diametrically opposite evidence for Fridays. Some recent studies however have questioned continuing presence of such an in U.S as well as in a few other national markets. To determine presence of this anomalous effect, this study relies on GARCH methodology. The findings indicate a persistent presence of day-of-the-week in Chilean market throughout study period. However, our results are sample period specific. While in first sub-period, said was caused by traditional Monday-Friday pattern, in second sub-period, anomalous was attributable to significantly positive Wednesday returns. Moreover, this study finds that daily returns on Santiago Stock Exchange are far more dependent on previous day's returns than on day of week. (ProQuest: ... denotes formulae omitted.) INTRODUCTION Finance literature offers extensive evidence of day-of-the-week in both, developed and developing markets. The Monday returns for equity markets have been found to be lowest of week and often negative. Simultaneously, Friday returns have been documented to be highest of week. Several recent studies have questioned day-of-theweek results uncovered by relying on OLS methodology (see for example, Connolly (1989), Chang, et al. (1993) and Dubois and Louvet (1996)). And yet, use of more robust econometric techniques has not always led to disputing OLS method based findings regarding presence of anomalous effect. For example, while Alexakis and Xanthakis (1995) and Kamath, et al. (1998) have reported that evidence on anomalous in their studies was methodology independent, Chen, et al. (2001) paper concluded that their findings were both, estimation methodology specific as well as sample period specific. The objectives of this study are to determine if there is evidence of day-of-the-week on emerging equity markets of Chile and to ascertain if findings on the effect are sample period specific. Bollerslev's GARCH methodology is utilized in this study of Santiago Stock Exchange of Chile. To meet stated objectives, we utilize daily data of Selective Stock Price Index, IPSA (Indice de Precios Selectivo de Acciones) over most recent 68 -month period from January, 2003 through August, 2008. PREVIOUS RESEARCH Numerous studies of seasonal anomalies in equity markets can be found in finance literature. The empirical evidence on presence of day-of-the-week occupies a central role in these studies. The well known articles by French (1980), Gibbons and Hess (1981), Keim and Stambaugh (1984), among others have indicated that market returns tend to be dependent on day of week. Lakonishok and Smidt (1988) found that such an anomalous was present in Dow Jones dating back to 1897. In an overwhelming majority of older studies, OLS methodology was utilized to detect :the effect. Connoly (1989) was one of first researchers who argued that return distributional characteristics of stock markets did not advocate use of OLS method. Connolly's findings suggested that intensity of day-of-the-week had weakened considerably after 1975. …