Efficient market reflects that the market where all the participants get the same information at the same time and the stock price would immediately respond to the available information. With the appearance of these anomalies, it has violated the theory of efficiency market. Stork return becomes predictable and no longer random. This allowed investor to make strategy to earn more profit.
Calendar Anomalies
There are many research have found several regularities which will influence the stock returns. Lakonishok & Smidth (1988) has shown that, there are persistently anomalous returns around:
January Effect
Day of the Week Effect
Turn of the Month Effect (TOM)
Pre-Holiday Effect
Some definition and research would be briefly introduced in the following part.
January Effect
January effect is one of the most common calendar anomalies. In year 1976, Rozeff & Kinney (1976) found out that, the stock return in higher in average in the month of January compare with other months. The average return on low-capitalization stocks are unusually high relative to those on large-capitalization stock in early January is also known as turn-of-the year effects (Ritter, 1988).
There are lots of country experiences the effect of January effect such as Australia, Belgium, Canada, Denmark, Germany, Japan, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom which already prove by Gultekin & Gultekin (1983). In addition, a research on American stock return for the period 1931-2005, 1931-1978 and 1979-2005 three periods was bring out. It shows that, January effect does exist in value-weighted and equal-weighted portfolio in all three periods. This January effect was increasing in dividend yields and book-to-market ratio, and is decreasing in portfolio size (Hu, 2005).
There are many research try to find out the reason for January effect, Reinganum (1983) said the abnormally high stock return at the beginning of January appear to be consistent with tax-loss selling but tax-loss selling cannot explain the entire January effect. Besides, the buying and selling behavior of individual investors at the turn of the year can be one of the reasons higher stock returns in January.
Day of the Week Effect
The second common calendar anomalies would be day of the week effect. In year 1980, French (1980) said that, from the close of the trading Friday to the close of the of trading Monday there are three days investment in the return for Monday, while the stock returns for the other days only reflect one day investement. Therefore, the expected return on Monday supposes to be three times the expected return for other days of the week. However, the result shows that, while the average return for Tuesday to Friday was positive, the average return for Monday was significantly low. In addition, Keim & Stambaugh (1984) has made a further investigation of the weekend effect on 30 individual stock of Dow Jones Industrial Index. They found out that, the mean return on Monday is negative and abnormally low while the mean return on Friday is positive and generated the highest in a week.
There are several countries exhibit the weekend effect such as in Taiwan stock market (Huang et al., 2010), in New York Stock Exchange (NYSE) (Keim & Stambaugh, 1984), in Australia, Canada, Japan, United Kingdom (UK) even though the significant of the effect is diminishing over time (Jaffe & Westerfield,1985), Japan (Boynton et al., 2009) and etc.
There are evidence shows the weekend effect does appear in Turkey also but it has completely vanished at the end of year (Kamath & Liu, 2010). Abraham & Ikenberry (1994) states that, the trading behavior of individual investors appear be at least one factor contributing to the weekend effect.
Turn of the Month Effect
On the other hand, there are many researches on turn of the month effect (TOM effect) too. Ariel (1987) claims that, when there are TOM effect occur, the mean return for stock is positive only for days immediately before and during the first half of calendar months and indistinguishable from zero for days during the last half of the month. Besides, the TOM effect is equally strong for large firm and small firm (Pettengill & Jordan,1988).
There are also many studies show that, this TOM effect has occur in many country. Cadsby & Ratner (1992) shows TOM effect is significant in Canada, UK, Australia, Switzerland, and West Germany. The recent evidence, Kunkel et al. (2003) shows that, there are 16 countries shows TOM effect from period 1988-2000. These countries account for 88% of the world's market capitalization value, and these countries are eight European countries (Austria, Belgium, Denmark, France, Germany, Netherlands, Switzerland, and UK), four Far East countries (Australia, Japan, New Zealand, and Singapore), Canada, United States, Mexico, and South Africa.
There are many research try to figure out the factor which cost TOM effect. Institutional investment does impact the TOM effect but institutional investors are not the only one responsible for TOM effect (Wiley & Zumpano, 2009). Jussi et al. (2009) claims that, United State macroeconomics news announcement create the TOM effect occur in Finnish stock market.
Pre-Holiday Effect
Pre- Holiday effect is one of the calendar effects which had prove by several study which indicates that, the stock returns before holiday are higher than the non-holiday. Lakonishok et al. (1988) proved that the rate of return for the pre-holiday effect is 23 times larger than the regularity daily rate return. Besides, Ariel (1990) also shown that there are nine to fourteen times more for the means of pre-holiday return compare with the means for non-pre-holiday returns.
By examining the returns from trading the closet to maturity Australian Share Index (SPI) futures, Johnson & Sum (1999) found evidence that higher return for the days pre-ceding holidays but no evidence of higher returns on exchange open holidays or the day following either an exchange open or exchange close holidays. In Spanish, all Spanish stock and those stocks which traded in both US and German market exhibiting pre-holiday effects with respect to Spanish holidays and none of them show any significant pre-holiday effect that could be related to other calendar anomalies such as Friday, January and turn-of- the year effect. Chong et al. (2005) also found that, actually there are pre-holiday effect exists in the three major international markets, United States (U.S.), United Kingdom(U.K.) and Hong Kong but the effect has declined and it's significant in U.S. (Meneu et al., 2004).
Even there are empirical researches in an attempt to explain this seeming anomaly for pre-holiday effect where higher stock returns are observed before holidays. Meneu & Pardo. (2004) have shown that the abnormal increase in the average size of bid order before holidays might because of the reluctance of small investor to buy stock before holidays. In addition, Cao et al. (2009) found that, there are inverse relation between firm size and pre-holiday effect which means pre-holiday effect only limited to firms in Small Cap Index, compare to Medium Cap Index and Large Cap firms.
Bursa Malaysia
Based on the definition in Jothee & Annuar (2006)s' research, Kuala Lumpur Stock Exchange(KLSE) market is the premier secondary stock market in Malaysia, which classified to be one of the 16 emerging stock market that exists in the Asia Pacific Region. In year 2004, they change their name into Bursa Malaysia. Bursa Malaysia established in year 1930 and the first formal securities business organization is Singapore Stockbrokers' Association. Besides, KLSE incorporated with Kuala Lumpur Stock Exchange Berhad in year 1976 as a company limited by guarantee and take over the company.
Nowadays, Bursa Malaysia was listed on the main board of bursa Securities. By Lee and Lee (2008) study, they claims that, there are currently 988 companies in Bursa Malaysia, 637 companies in Main Board, 227 companies in Second Board ans 124 companies on MESDAQ.
History of Bursa Malaysia
Singapore Stockbrokers' Association was establish in 1930. It was the first formal securities in Malaysia and it was registered as the Malayan Stockbrokers' Association in 1937. Malayan Stockbrokers' Association was launched in year 1960. The public trading of shares lead off at 1960 too. At that moment, there was one trading room in Singapore and Malaysia respectively which connected by telephone lines provided for the trading of public shares.
Short after the year of Stock Exchange of Malaysia established, 1964, the Singapore was separated with Malaysia in 1965 and the Stock Exchange of Malaysia was renaming as Stock Exchange of Malaysia and Singapore. However, in 1973, this Stock Exchange of Malaysia separated into Kuala Lumpur Stock Exchange Berhad (KLSEB) and Stock Exchange of Singapore (SES) due to the termination of currency interchangeability between Malaysia and Singapore. Within the same year, the Kuala Lumpur Stock Exchange (KLSE) was integrated as a company limited which limited by guarantee has took over the operation of KLSEB. A central market place for buyers and sellers to transact business in shares, bonds, and various other securities of Malaysian listed company was provided by KLSE. Besides, those Singapore incorporate company were delisted on KLSE and vice versa for Malaysian companies which listed on SES in year 1990.
Once again, KLSE changed their name into Bursa Malaysia on April 14, 2004. It converted into a public company limited by shares and in the same time, the securities exchange business unconditioned and appear as a new wholly-owned subsidiary, Bursa Securities. At the same time, Bursa Malaysia was converted from a non-for-profit organization to an entity limited by the stock, responding to the global trend by being more customer-driven and market oriented. Then Bursa Malaysia was listed in Main Board of Bursa Malaysia Securities Berhad (Bursa Malaysia, 2010).
Sector Indices
Sector indices summarize the performance of stock group by specific market sector. This allows investors to benchmark the performance of a particular stock market sector or industry.
All the indices are derived from the companies listed in the Main Market and weighted by capitalization. The index is calculated by:
The stock list in Bursa Malaysia can be classified into a total ten sectors. They are:
basic material sector
communication sector
consumer cyclical sector
consumer non-cyclical sector
diversified group sector
energy sector
financial sector
industrial sector
technology sector
utilities sector
The detail of each sector has been listed in Table 1.1.
Table 1.1 Public Mutual Sector Classifications
Sector
Industry Group
Basic Material
Manufacturing of Metal, Chemical, Packaging Materials
Communication
Telecommunications and Media
Consumer Cyclical
Automobile, Retailing, Airlines
Consumer Non-Cyclical
Agricultures, Food and Beverages, Pharmaceuticals, Cosmetics
Diversified Group
Conglomerates
Energy
Oil & Gas, Coal
Financials
Banks, Insurance, Real Estate
Industrial
Construction, Shipbuilding, Transportation
Technology
Semiconductors, Computers
Utilities
Electric, Gas, Water supply services
Source by Public Mutual 2008
In term of market capitalization, the largest sector in Bursa Securities' total market capitalization for Main Board Stock is financial sector which comprise the industry of banking, insurance and real estate. It has occupied 25% of the Bursa Securities' total market capitalization. However, the other major sector would be consumer non-cyclical sectors, industries and consumer cyclical sectors which account for 18.6%, 15.8%, and 12.6% respectively in Bursa Securities' total market capitalization.
The comparisons pie-chart for financial sector with the other major sector which is consumer non-cyclical sectors, industries sectors, consumer cyclical sectors and so on is shown in Figure 1.1.
Figure 1.1 Sector Breakdown of Bursa Securities' Main Board Stock Market Capitalization
Therefore, the Financial Sector has been choose as the sample data here is due to Financial sector in Malaysia has the highest weighed individual sector indices in Bursa Securities' Main Board stock.
Definition for Holiday
Holiday is defined by Chong et al. (2005) as the holiday which makes the closure of the stock exchange market with the condition of:
Holiday which more than one day will be treated as single holiday
Holiday which continue intervening weekend will be treated as single holiday too.
Problem Statement
It is important to know whether the Calendar Anomalies are independence or not. As an example, if the country has January Effect and if there are large numbers of holidays fall in the month of January, there is the possibility that any documented holiday effect may simply be a manifestation of the January seasonal which means the Pre-Holiday effect actually does not appear in that country, it is just a manifestation of January Effect.
As mention in part 1.1, with the knowledge of Calendar Anomalies, investor can violated the theory of efficiency market. With the knowledge of Calendar Anomalies, the stock return becomes predicable and no longer random. These allow the investor make themselves more profit. If the pre-holiday effect is a manifestation of other Calendar Anomalies, then the investor can exclude the consideration of pre-holiday effect in order to avoid making high prediction on the stock return.
Objectives
Pre-holiday effect is one of the calendar anomalies which already being confirm and there are enough evidence to show that this effect is exist in certain country. When this affect applied, the share return would act anomalies such as exhibit positive returns on days immediately preceding a holiday. Johnson & Sum (1999) found out that there was higher return for the day before holiday. However, there is no evidence to show that higher return on exchange open holidays or the day following either an exchange open or exchange closed holidays.
Nonetheless, there are the possibility of that the holiday effect is just a manifestation of other already well documented anomalies. Even though Ariel (1990) found out that, the pre-holiday effect is not a manifestation for January effect, small firm effect and weekend effect Dow Jones Industrial Average but there has no one try to figure out that the pre-holiday effect is a manifestation of other effect in Malaysia.
Therefore the purpose of this paper is:
to show there are pre-holiday effect in Malaysia.
to investigate the pre-holiday effect after isolated the Financial Indices in Malaysia from other known calendar time regularities.
Scope of Study
The daily stock return of financial sectors was taken from Datastream. Sample period is 8 years data which chosen from April 1999 until March 2007.
Organization of Study
This dissertation is divided into six parts. Section two provide discussion of empirical literature review of pre-holidays effect, the previous calendar anomalies in Malaysia and the literature review on financial sector. Section three is the outlined the methodology used in this study. Section four is result and discussion and Section five would be the conclusion of this dissertation.
