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Impact of Public Holiday on Stock Returns

In: Business and Management

Submitted By shamsdin89
Words 4168
Pages 17
CHAPTER 1: INTRODUCTION 1.1 Background
Stock markets play a significant role in the wellbeing of an economy; thus efficient stock markets will positively affect the economy in a country. Concept of efficient markets was first coined by Fama(1970), describes an efficient market, as a market with fully available information to all investors, while at the same time stock prices fully reflect all the information available. Consequently, no individual investor will be able to reap profits above the average. Fama further describes the EMH in three form i.e. weak, semi-strong and strong form of efficiency.
In Weak form efficient market stock prices have a random movement. We cannot use previous stock prices to predict future prices of stocks. We can beat the market by technical analysis or by analyzing company specific information. Unit root test is normally used to check weak form efficiency. In Semi strong form good or bad news are adjusted in stock prices and hence have no impact on stock market returns. Event study is usually conducted to check for semi form efficiency (Fama, 1991).
Efficient market hypothesis is always being a controversial topic. Financial markets are not always efficient because there are some anomalies. Fama (1991) respond to anomalies that there is no room for seasonal movements in efficient market. But if these movements exist in stock markets, there are limitations in our statistical models which do not capture it.
Financial anomalies mean the abnormal behavior of stock market in some situations. Some of these anomalies are: day of the week effect, January effect and turn of the month effect. Among these anomalies one known anomaly is holiday effect also known as Pre-holiday effect. The returns of stock market indices remain same are revert to mean in normal days, but before holidays the returns are usually greater than normal or…...

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