An Enquiry into the Persistence of Turn-of-the-Month Effect on Stock Markets in India: Insights and Perspectives on a Seasonal Anomaly

Abstract

Asset pricing in capital markets is a strikingly vibrant area of academic research and is considered as an indicator to evaluate the efficiency of stock markets. Though the explanation for the seasonal behavior of capital markets was attempted by various market models, several anomalies were observed historically. Calendar anomalies that belong to the specific class of seasonal anomalies provided abnormal returns in the global stock markets at regular intervals within and across various calendar years. This article documents the study on one such anomaly—namely, the turn-of-the-month effect in the context of Indian stock indices. In this pursuit, exhaustive research has been carried out considering all the broad-market and sectoral indices of two major stock exchanges, namely, National Stock Exchange and the Bombay Stock Exchange. The study used the ARIMAX methodology with dummy exogenous variables (to represent the turn-of-the-month days) and presented comprehensive findings and learnings. Besides, this article attempts to analyze the changes in the strength and significance of the anomaly in progression with various stock market reforms in both the broad-market and sectoral indices to provide new insights into the efficiency of Indian stock market exchanges.