The day-of-the-week effect is a market anomaly that manifests as the cyclical
behaviour of traders in the market. This market anomaly was first observed by M.F.M.
Osborne (1959). The literature distinguishes between two types of cyclical effects in
the market: the cyclical pattern of mean returns and the cyclical pattern of volatility in
returns.
This dissertation studies and reports on cyclical patterns in the South African market,
seeking evidence of the existence of the day-of-the-week effect. In addition, the
dissertation aims to investigate the implications of such an effect on hedge fund
managers in South Africa.
The phenomenon of cyclical volatility and mean returns patterns (day-of-the-week
effect) in the South African All-share index returns are investigated by making use of
four generalised heteroskedastic conditional autoregressive (GARCH) models. These
were based on Nelson's (1991) Exponential GARCH (EGARCH) models. In order to
account for the risk taken by investors in the market Engle et al's, (1987) 'in-Mean'
(risk factor) effects were also incorporated into the model. To avoid the dummy
variable trap, two different approaches were tested for viability in testing for the day-of-
the-week effect. In the first approach, one day is omitted from the equation so as to
avoid multi-colinearity in the model. The second approach allows for the restriction of
the daily dummy variables where all the parameters of the daily dummy variables adds
up to zero.
This dissertation found evidence of a mean returns effect and a volatility effect (day-of-the-
week effect) in South Africa's All-share index returns data (where Wednesdays
have been omitted from the GARCH equations). This holds significant implications for
hedge fund managers. as hedge funds are very sensitive to volatility patterns in the
market, because of their leveraged trading activities. As a result of adverse price
movements, hedge fund managers employ strict risk management processes and
constantly rebalance their portfolios according to a mandate, to avoid incurring losses.
This rebalancing typically involves the simultaneous opening of new positions and
closing out of existing positions. Hedge fund managers run the risk of incurring losses
should they rebalance their portfolios on days on which the volatility in market returns
is high. This study proves the existence of the day-of-the-week effect in the South
African market.
These results are further confirmed by the evidence of the trading volumes of the JSE's
All-share index data for the period of the study. The mean returns effect (high mean
returns) and low volatility found on Thursdays, coincide with the evidence that trading
volumes on the JSE on Thursdays are the highest of all the days of the week. The
volatility effect on Fridays, (high volatility in returns) is similarly correlated with the
evidence of the trading volumes found in the JSE's All-share index data for the period
of the study. Accordingly. hedge fund managers would be advised to avoid rebalancing
their portfolios on Fridays, which show evidence of high volatility patterns. Hedge fund
managers are advised to rather rebalance their portfolios on Thursdays, which show
evidence of high mean returns patterns, low volatility patterns and high liquidity. / Thesis (M.Com. (Risk Management))--North-West University, Potchefstroom Campus, 2006.
| Identifer | oai:union.ndltd.org:NWUBOLOKA1/oai:dspace.nwu.ac.za:10394/1164 |
| Date | January 2005 |
| Creators | Heymans, André |
| Publisher | North-West University |
| Source Sets | North-West University |
| Detected Language | English |
| Type | Thesis |
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