Predictability of the Saudi Arabian market.

• Author: Azizan, Noor Azlinna
• Position: Report

1. INTRODUCTION

   Seasonality or seasonal variations refer to the changes that happened periodically in different time and the time terms such as less than one year. Hylleberg (1992, p.4) defined the seasonality in economic time series as the systematic, although not necessarily regular, intra-year movement caused by the changes of the weather, the calendar, and timing of decisions, directly or indirectly through the production and consumption decisions made by agents of the economy. These decisions are influenced by endowments, the expectations and preferences of the agents, and the Production techniques available in the economy. This definition stresses both the characteristic features of the seasonal components, and their causes. This study will analyses the seasonal pattern the monthly or weekly pattern of stock market which usually describes the main properties of the data, for example values for the minimum and maximum return. Seasonality would be a factor in stock returns if the average returns were not the same in all periods.

   The existence of the seasonal effect negates the weak form of the Efficient Market Hypotheses (EMH) and implies market inefficiency. In an inefficient market, investors are able to earn abnormal returns. A few studies have examined the issue of seasonality of stock returns in the emerging capital markets Ignatius (1992). In this study, we extend the investigation of the day of the week effect and the month of the year effect on stock returns for Saudi Arabian stock market by using three different statistical methodologies. We would like to investigate if the Saudi Arabian stock market exhibits the seasonality which contradicts to market efficiency.

   The day-of-the-week effect may indicate that returns are abnormally higher on some days of the week than on other days. Specifically, results derived from many empirical studies showed that the average return on Friday is abnormally high, and the average return on Monday is abnormally low. Several studies on the daily seasonal anomaly have been conducted in Asean stock markets. Lian and Chen (2004) studied daily anomalies in the five Asean equity markets of Malaysia, Singapore, Thailand, Indonesia and the Philippines before, during and after the Asian financial crisis for the period from January 1992 to August 2002. They reported that Monday and Friday effects are most predominant during the pre-crisis period. Only the Tuesday effect in Thailand and the Philippines is observed during the crisis period. Whereas the pattern of daily anomalies in Thailand during the post-crisis period reverts to that of the pre-crisis period, the other four markets Malaysia, Singapore, Indonesia and Philippines exhibit different patterns of daily anomalies compared to the pre-crisis period.

   Chia, Liew and Wafa (2006) looked at the Malaysia stock markets for the period from December 1993 to October 2005. The examination of the day-of-the-week effect and three periods are identified in their study: 2 December 1993 to 31 May 1997, 1 June 1997 to 30 January 1998, and 1 February 1998 to 10 October 2005. In relation to the Asian financial crisis, these three periods correspond approximately to the pre-crisis period, the crisis period, and the post crisis period, respectively. Different patterns of day-of-the-week effect were revealed in Malaysia equity markets for pre- during- and post-crisis periods. Generally, the Monday and Friday effects feature predominantly during the pre-crisis period.

   Furthermore Yakob, Beal and Delpachitra (2005) found that the day-of-the-week effect is presented in only five countries of ten Asia Pacific stock market namely Australia, China, Hong Kong, Japan, India, Indonesia, Malaysia, Singapore, South Korea and Taiwan. The study shows patterns of seasonality differ from one country to another. For example Indonesia documented negative Monday or weekend effect, whereas Friday records the largest positive returns of all days. Tuesday effect is detected in China. For both countries Australia and Taiwan documented Friday effect. However no evidence of day of the week effect in Hong Kong, Japan, Malaysia, Singapore and South Korea.

   Apolinario, Santana, Sales and Caro (2006) report that in most European markets as following Germany, Austria, Belgium, Denmark, Spain, France, The Netherlands, Italy, Portugal, The United Kingdom, The Czech Republic, Sweden and Switzerland for the period from July 1997 to March 2004 do not reflect a day of the week effect since the results for each day do not differ significantly from the other days of the week. However a seasonal effect can be observed on Mondays for the French and Swedish markets. The Swedish market also reflects a significantly higher return on Fridays as opposed to the remaining days of the week.

   Other study by Berument and Kiymaz (2003) investigate the day of the week effect on major stock market indexes for the period from 1988 to 2002 .They found that the day of the week effect is present and the highest returns occurs on Mondays for Germany and Japan, on Fridays for Canada and the United States, and on Thursdays for the United Kingdom. The lowest return occurs on Mondays for Canada and Tuesdays for Germany, Japan, United Kingdom and United States.

   Finally, Rossi (2007) South America Specifically, Argentina, Brazil, Chile and Mexico. He found that for the period from 1997 to 2006 there was the traditional positive Friday effect in Brazil. Whereas in Chile he found that the returns had been lowest on Mondays. In addition, he also documented positive returns on Wednesdays and Fridays. While In Mexico he also found that the highest returns appeared on Wednesdays. For Argentina he did not document any day of the week anomaly.

   The month-of-the-year effect presents when returns of some months are higher than those of other months. A number of empirical studies on the month seasonal anomaly have been conducted in Asian stock markets and other countries. In the Malaysia market, a number of studies has found month-of-theyear effect.

   Chotigeat and Pandey (2005) studied of the existence of seasonality in monthly stock returns in the emerging Asian stock markets of Malaysia and India they use monthly closing share price data of the Kuala Lumpur Stock Exchange for the period from January 1992 to June 2002 and they use monthly closing share price data of the Bombay Stock Exchange for the period from April 1991 to March 2002. For Malaysia Case seasonal effect is confirmed the average returns for the months of February and December are much higher than returns of other months. Whereas Indian Case seasonal effect is also confirmed the average returns for the months of March and October are much higher than returns of other months. Another study by Wong, Ho and Dollery (2007) employed the monthly closing prices of KLCI for the Malaysian stock market for the period from January 1994 to December 2006 they found that monthly effects did...