Stock Returns and Economically Neutral Behavioural Variables Relationship in the Nepalese Stock Market

Abstract

In this paper we extend the research on the relationship between economically neutral behavioural variables and stock returns documented in Saunders (1993), Hirshleifer and Shumway (2003), Cao and Wei (2004, 2005) and Kamstra, Kramer and Levi (2003) by examining a stock market of a single small developing country (Nepal), Nepal Stock Exchange (NEPSE), that have received little attention in the literature. In particular we focus on three mood proxy variables, all continuous: two are the weather variables (cloud cover and temperature) and third one is a biorhythm variable (SAD). The results of our study showed that there is significant relationship (positive) between stock returns and economically neutral behavioural variable represented by the cloud cover. This finding is inconsistent to that reported by Saunders (1993) and Hirshleifer and Shumway (2003) who observed significant negative relationship between stock returns and Cloud cover. With respect to temperature and SAD variable we do not observe such significant relationship. These results are also inconsistent to the findings documented in Cao and Wei (2004, 2005) and Kamstra et al (2003) who reported the significantly negative relationship between stock returns and temperature and positive and significant relationship between stock returns and SAD variable respectively. Interestingly, our findings are however consistent for subperiod (the exception is first sample period) and for one of the industrial index, we examine. The overall results lead to the conclusion that Nepalese stock market is not efficient in the weak form of efficiency.