The Day of the Week Effect in the Pakistani Equity Market: An Investigation

Abstract

An active area of investigation in finance literature is to explore the existence of a pattern in stock returns. A predictable pattern is evidence against market efficiency. Even if the pattern does not seem to affect the stock returns directly, it can provide useful clues to investors concerning their investment decision. One of the significant patterns identified is the day of the week effect which implies that stock returns are not distributed identically across the days. For example, in the U.S. capital market, rates of return on Mondays tend to be negative while those on Fridays tend to be high. Cross (1973), French (1980), Gibbons and Hess (1981), Keim and Stambagh (1984) and others consistently observed lowest returns on Mondays, termed as the ‘Monday effect’. Similar kinds of effects have been found in other capital markets. For example, Jaffe and Westerfield (1985 a,b) observed the Tuesday effect in the Japanese and the Australian capital markets, whereas Broca (1992) found the Wednesday effect in the Indian capital market. On the other hand, Malaikah (1990) and Aybar (1992) did not find any evidence of the day of the week pattern in the capital markets of Saudi Arabia, Kuwait, and Turkey. At present, there is no satisfactory explanation for this anomaly. Perhaps evidence from other capital markets will provide some clues to explain the phenomenon.This paper investigates the day of the week effect in the Pakistani equity market using daily sector indices from the Karachi Stock Exchange (KSE), the main equity market in Pakistan1. The market has been the subject of significant changes in the 1990’s. Like other developing economies, Pakistan has also taken significant steps towards the development of its capital markets. Various measures have been taken for privatisation, economic liberalisation, relaxation of foreign exchange controls, and the easing of regulations on the repatriation of profits, investment and operation of financial institutions. The most significant step was the opening of the equity market to international investors in February 1991. The paper is organised as follows. The first section describes the data and the sample. Section II discusses the methodology, whereas results are presented in section III. The final section is the summary and conclusions.