Anomalies in the Nepalese Stock Market

With reference to the articles posted at VC regarding the anomalies in stock market and efficiency as well as some other materials provided via email, please categorize different kinds of anomalies found in stock market in the literatures in respect to national context and international context. What kind of differences prevails in anomalies of Nepalese market and international market? Give you own conclusion.

• Anomalies in the Nepalese Stock Market:

1. Day-of-the-Week Effect:

Average daily returns show fluctuations in different days of a week and a certain pattern can be observed as per the days when the returns are higher in some days of the week as compared to the other days. This type of effect is called ‘day-of-the-week effect’ or ‘weekend effect’ or ‘Monday effect’. Different studies have documented statistically positive returns on common stock in different particular day of the week for different countries. Likewise, in Nepal, the number of transactions is significantly small on Sundays and Fridays which is because Sunday was a government holiday during September 1999 to March 2005 and the stock market is closed on Friday and Saturday after September 2007; which is the sample period of the study. The NEPSE returns is highest for Friday and lowest for Monday. Also, the daily stock returns is negative for only Monday and Thursday. The risk is higher on Friday while there is a lowest risk on Tuesday.

2. Months-of-the-Year Effect:

Month -of-the-Year Effect is the anomaly that reflects the behavior of the stock market in different days of the week, different time of the month and different time of the year.

Depending upon the type of calendar being followed, it can be categorized into two types.

1. Months-of-the-Year Effect (Based on Gregorian calendar)

This anomaly is the tendency of stock market during between December 31 and the end of the first week in January. It is often known as January effect or turn-of-the year effect. Generally, in context of Nepal an average daily returns during December to March is negative whereas it is positive for rest of the months. The average daily returns is smaller in the month of January at and it is higher in the month of July.

 Similarly, if we consider the sectoral returns and risk, the lowest average daily returns is in the month of May for commercial banking sector. The highest returns is also there in sector in the month of April. The overall lowest return is observed in finance company sector with maximum returns in the month of March and minimum returns in the month of May. Maximum risk is observed in the month of May in commercial banking sector and lowest risk is observed in the month of June in manufacturing sector.

According to the regression analysis done for the NEPSE, on the basis of Gregorian calendar, in 2010, the stock returns in the month of January seem to be lower than in other months. The return in the month of July is highest i.e. at 0.25%.

With respect to returns on sectoral indices, the returns on most of the sectors are not different from month to month. However, in case of hydro sector, the returns in January is significantly lower and in February, April, May, June, July, August and September and December it is significantly higher at 1%. Whereas, the returns are significantly higher in the month of March at 10%.

1. Months-of-the-Year Effect (Based on Nepali Calendar)

In Nepal stock market depicts behavior on the basis of the Nepali calendar. The BikramSambat calendar is used as the official calendar of the country which is based on solar system. So, regarding the very Nepali calendar average daily returns in the Nepalese stock market (NEPSE return) is highest in the month of Kartik whereas it is lowest in the month of Falgun.  Similarly, the average risk of daily returns is highest in the month of Shrawan and lowest in the month of Paush.

In context of sectoral return development banking sector seems to offer highest daily returns. Again, we have the evidence of analysis done by NEPSE in 2010 that finance company sector looks poor in offering the daily average returns with -0.06% with the risk of 6.49%. Further, in Nepal the stock market for the Hydro sector is less risky and commercial banks seem to be the most risky one.

3. Lunar Calendar Effect:

As per the evidences from different documents there seems to be a close relation between lunar phases and human moods. Similarly, the lunar phases have an impact on stock returns as well. In Nepal, as per the formal calendar, many activities are allowed and prohibited based on the SuklaPakchha’ (Full Moon) and ‘Krishna Pakchha’ (New Moon) as they have their own values. There are 24 more Pakchhas every 12 months. No significant evidence is found for any difference in returns between SuklaPakchha and Krishna Pakchha. However, the number of transactions is slightly higher for Krishna Pakchhas in all sectors. The returns in Ashwin Krishna Pakchha is significantly lower than in other 23 Pakchhas as this is the time before Dashain- the season with the longest holiday and people prefer to visit places, celebrate with their families and friends during this time of the year hence resulting in the selling of the holdings to accumulate the money for the celebrations. This results into supply pressure in the stock market and thereby reduction in the stock returns. The average daily NEPSE returns is slightly higher for SuklaPakchha. It is still higher for six sectoral returns out of nine. The standard deviation for SuklaPackhha in case of NEPSE returns is slightly low. Whereas, in case of six sectoral returns the risk is a little bit high in SuklaPackhha.