Seasonality in the Indian Stock Markets: A Study of Calendar Effects

Abstract

Theoretical and technological advances in Behavioural Finance over the last decades seem to have shifted the paradigm away from the Efficient Market Hypothesis proposed by Fama in 1970s. The hypothesis implied that securities are always priced efficiently since all the relevant information is fully reflected in their prices. However, this normative statement comes under heavy scrutiny with the existence of seasonality in stock returns. This paper investigates seasonality in the Indian stock markets through the existence of calendar effects. Employing time series analysis on data from January 1999 to December 2015, the presence of calendar effects is studied in three BSE indices-Sensex, BSE200 and BSE 500 using a dummy variable regression model in both the daily returns (using EGARCH modelling process) and monthly returns (using OLS estimation procedure). It is found that the while the SENSEX index does not show any significant calendar effect, seasonality does manifest in the larger BSE 200 and BSE 500 indices in form of both days-of-the-week effect and month-of-the-year effect, thereby suggesting that Indian stock markets do not show informational efficiency even in the weak form. The study concludes that the observed patterns are useful in timing the deals by exploiting the observed irregularities in the Indian stock market returns.