Vacillating Behavior of TOM Effect and Adaptive Market Hypothesis: A Firm Level Evidence from Emerging Stock Market of Pakistan

Abstract

Through the current study we amplify the available literature on AMH (Adaptive Market Hypothesis) and calendar anomalies because this is the first study of its nature which links TOM effect with AMH which allows the behavior of conventional TOM-effect to swing over time. To fulfill the drive, study investigates daily mean return from PSX of Pakistan using data of 107 firms individually over a longer period of time ranging 1996-2015. To discover the time variation in the levels of predictability of TOM returns, study uses four different sub-samples covering identical length of observations of five years each to investigate how TOM effect has performed over time. There are few studies in the literature investigating TOM effect at firm level and very rare studies examining TOM effect through (AMH), so the current study may be of importance and interest to finance researcher, academicians and practitioners alike. To elucidate the volatility and its varying nature, the study applies GARCH (1,1) regression model which enables for time-variation in volatility of security returns. Kruskal-Wallis test-statistic is used to handle non normality in the equity return series. We find that with the passage of time performance of TOM effect evolves, consistent and aligned with the assertion of AMH. Finally, this study exhibits that behavior of TOM effect is well elucidated by Adaptive Market Hypothesis (AMH) than conventional Efficient Market Hypothesis (EMH). The results may be used for better decision making for investors and the article complements studies on market efficiency and TOM effect in developing and developed countries.