Security price anomalies in the London International Stock Exchange: a 60 year perspective

Abstract

This paper investigates the existence of security price anomalies, or 'calendar effects' in the Financial Times Industrial Ordinary Shares Index over a 60 year period: 1 July 1935 through 31 December 1994. Our results broadly support similar evidence documented for many countries concerning stock market anomalies, as the weekend, January and holiday effects all appear, to some extent, to be present in our data set. We conclude, that even if these anomalies are persistent in their occurrence and magnitude, the cost of implementing any potential 'trading rules' may be prohibitive due to the illiquidity of the market and 'round trip' transactions costs. This is of course perfectly consistent with the notion of market efficiency, in that no strategy exists that will consistently yield abnormal returns.

Does the day of the week effect exist once transaction costs have been accounted for? Evidence from the UK

“…This is in agreement with the previous literature such as Mills and Coutts (1995) and Arsad and Coutts (1997). The second conclusion is that once transactions costs have been accounted for, the day of the week effect seems to no longer be an enduring anomaly.…”

“…The conventional methodology employed in the anomalies' literature was utilized in order to test for a day of the week effect (see Arsad and Coutts, 1997). Thus, daily returns are regressed on five dummy variables each one representing a day of the working week to see whether there is any statistically significant difference among returns on different days: The methodology used is shown in Equation 1.…”

“…Moreover, Connolly (1989) using US data (adjusted for sample size, heteroscedasticity and serial correlation) reported that day of the week effects disappeared in the US equity markets after 1975. With respect to the UK stock market Mills and Coutts (1995) and Arsad and Coutts (1997) have both found evidence that a day of the week effect exists in the UK stock market. Day of the week effects alongside seasonal and holiday patterns (anomalies) 3 have existed for over half a century and led some financial economists to question the notion of market efficiency, and in particular, the capital asset pricing model (CAPM) and asset pricing theory (APT).…”

“…Lakonishok and Smidt (1988) were the first to draw attention to the fact that it might be wise to adopt a sceptical stance against the existence of anomalies until they have been supported by studies utilising datasets coming from different stock markets over different time periods. As Arsad and Coutts (1997) noted, relatively little research has been undertaken on regularities regarding the UK stock exchange data. Furthermore, as Bowers and Dimson (1988) pointed out, international contrasting provides the means for researchers to examine whether the US findings are also persistent, at least to some extent, elsewhere.…”

An analysis of private investors’ stock market return forecasts

“…More specifically, it has been found that the weekend return (i.e., the return from the close on Friday to the opening on Monday) is lower than the daily returns during the week (Arsad and Coutts 1997, Franses and Paap 2000, French, 1980, Keim and Stambaugh, 1984, Lakonishok and Smidt, 1988, Rogalski, 1984. There have been a variety of (modestly successful) attempts at explaining this phenomenon (e.g.…”