Calendar Effects in Stock Markets: Critique of Previous Methodologies and Recent Evidence in European Countries

This paper examines day of the week and month of the year effects in seventeen European stock market indexes in the period 1994-2007. We discuss the shortcomings of model specifications and tests used in previous work, and propose a simpler specification, usable for detecting all types of calendar effects. Recognizing that returns are non-normally distributed, autocorrelated and that the residuals of linear regressions are variant over time, we use statically robust estimation methodologies, including bootstrapping and GARCH modeling. Although returns tend to be lower in the months of August and September, we do not find strong evidence of across-the-board calendar effects, as the most favorable evidence is only country-specific. Additionally, using rolling windows regressions, we find that the stronger country-specific calendar effects are not stable over the whole sample period, casting additional doubt on the economic significance of calendar effects. We conclude that our results are not immune to the critique that calendar effects may only be a “chimera” delivered by intensive data mining. Key words: Day-of-the-week effect; Month effect, Market efficiency, European stock markets

Is the Dividend Puzzle Solved?

Since the 1960’s, there is an ongoing debate on dividend policy, which remains a controversial issue to this day. Why do firms pay dividends? The academics have not been able to agree on any convincing explanation, and the same time, many even claim that firms should not pay dividends, and so we have a “dividend puzzle”. The purpose of this paper is to summarize the main findings of two more recent fields of research, and to discuss why they seem to be the most promising avenues for further research, to solve the “dividend puzzle”, and to build a complete payout policy theory. These fields are: (i) the agency theory and (ii) the lifecycle theory. Besides being very intuitive, these theories are consistent with most empirical facts on U.S. firms’ payout policy.

Efficient Market Hypothesis in European Stock Markets

This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of France, Germany, UK, Greece, Portugal and Spain, from January 1993 to December 2007. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. The tests are performed using daily and monthly data for the whole period and for the period of the last five years, i.e., 2003 to 2007. Overall, we find convincing evidence that monthly prices and returns follow random walks in all six countries. Daily returns are not normally distributed, because they are negatively skewed and leptokurtic. France, Germany, UK and Spain meet most of the criteria for a random walk behavior with daily data, but that hypothesis is rejected for Greece and Portugal, due to serial positive correlation. However, the empirical tests show that these two countries have also been approaching a random walk behavior after 2003.

Random Walk Tests for the Lisbon Stock Market

This paper reports the results of tests on the weak-form market efficiency applied to the PSI-20 index prices of the Lisbon Stock Market from January 1993 to December 2006. As an emerging stock market, it is unlikely that it is fully information-efficient, but we show that the level of weak-form efficiency has increased in recent years. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. Non-trading or infrequent trading is not an issue because the PSI-20 only includes the 20 most traded shares. The tests are performed using daily, weekly and monthly returns for the whole period and for five sub-periods which reflect different trends in the market. We find mixed evidence, but on the whole, our results show that the Portuguese stock market index has been approaching a random walk behavior since year 2000, with a decrease in the serial dependence of returns.

An Arbitrage Model for the Stock Price Adjustment in the Dividend Period

Following a dividend distribution, investors expect the stock price to decrease on the ex-dividend day. With no market imperfections, the price decrease should exactly match the amount of the dividend, thus eliminating all opportunities for profitable arbitrage. Allowing for different taxes on dividends and on capital gains results in a stock price adjustment ratio different from one, but there is still a unique equilibrium. With a simple model, considering four types of investors, we show that the consideration of transaction costs results in multiple possible equilibria (equilibrium zone), defined by the arbitrage boundaries of each type of investors. We also show that trading activity by the different types of investors is reflected in abnormal trading volume

Random Walk Tests for tha Lisbon Stock Market

This paper reports the results of tests on the weak-form market efficiency applied to the PSI-20 index prices of the Lisbon Stock Market from January 1993 to December 2006. As an emerging stock market, it is unlikely that it is fully information-efficient, but we show that the level of weak-form efficiency has increased in recent years. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. Non-trading or infrequent trading is not an issue because the PSI-20 only includes the 20 most traded shares. The tests are performed using daily, weekly and monthly returns for the whole period and for five sub-periods which reflect different trends in the market. We find mixed evidence, but on the whole, our results show that the Portuguese stock market index has been approaching a random walk behavior since year 2000, with a decrease in the serial dependence of returns

Random Walk Tests for the Lisbon Stock Market

This paper reports the results of tests on the weak-form market efficiency applied to the PSI-20 index prices of the Lisbon Stock Market from January 1993 to December 2006. As an emerging stock market, it is unlikely that it is fully information-efficient, but we show that the level of weak-form efficiency has increased in recent years. We use a serial correlation test, a runs test, an augmented Dickey-Fuller test and the multiple variance ratio test proposed by Lo and MacKinlay (1988) for the hypothesis that the stock market index follows a random walk. Non-trading or infrequent trading is not an issue because the PSI-20 only includes the 20 most traded shares. The tests are performed using daily, weekly and monthly returns for the whole period and for five sub-periods which reflect different trends in the market. We find mixed evidence, but on the whole, our results show that the Portuguese stock market index has been approaching a random walk behavior since year 2000, with a decrease in the serial dependence of returns

Efficient market hypothesis in European stock markets

This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of UK, France, Germany, Spain, Greece and Portugal, from January 1993 to December 2007. We use a runs test, and joint variance ratio tests, which are performed using daily and weekly data for the period 1993–2007 and for a subset, 2003–2007. Daily and weekly returns are not normally distributed, because they are negatively skewed and leptokurtic, and also display conditional heteroscedasticity. Overall, we find mixed evidence on the efficient market hypothesis (EMH). The hypothesis is rejected on daily data for Portugal and Greece, due to first-order positive autocorrelation in the returns. However, the empirical tests show that these two countries have been approaching a martingale behavior after 2003. France and UK data rejects EMH, due to the presence of mean reversion in weekly data, and stronger in recent years. Taken together, the tests for Germany and Spain do not allow the rejection of EMH, this last market being the most efficient.info:eu-repo/semantics/publishedVersio

Is the Dividend Puzzle Solved?

Since the 1960's, there is an ongoing debate on dividend policy, which remains a controversial issue to this day. Why do firms pay dividends? The academics have not been able to agree on any convincing explanation, and the same time, many even claim that firms should not pay dividends, and so we have a "dividend puzzle ". The purpose of this paper is to summarize the main findings of two more recent fields of research, and to discuss why they seem to be the most promising avenues for further research, to solve the "dividendpuzzle", and to build a complete payout policy theory. These fields are: (i) the agency theory and (ii) the lifecycle theory. Besides being very intuitive, these theories are consistent with most empirical facts on U.S. firms' payout policy

Calendar effects in stock markets : critique of previous methodologies and recent evidence in european countries

This paper examines day of the week and month of the year effects in seventeen European stock market indexes in the period 1994-2007. We discuss the shortcomings of model specifications and tests used in previous work, and propose a simpler specification, usable for detecting all types of calendar effects. Recognizing that returns are non-normally distributed, autocorrelated and that the residuals of linear regressions are variant over time, we use statically robust estimation methodologies, including bootstrapping and GARCH modeling. Although returns tend to be lower in the months of August and September, we do not find strong evidence of across-the-board calendar effects, as the most favorable evidence is only country-specific. Additionally, using rolling windows regressions, we find that the stronger country-specific calendar effects are not stable over the whole sample period, casting additional doubt on the economic ignificance of calendar effects. We conclude that our results are not immune to the critique that calendar effects may only be a “chimera” delivered by intensive data mining