Effects of Calendar Holidays on Stock Return

effects first began to appear in the 1930s and although academics have only recently begun seriously to examine these return patterns, they have found them to survive close study. Calendar regularities generally occur at cusps in time, then in turn of the year and last in end month, week, day and Holidays. They often have significant economic impact. For example, the “Blue Mon- day” effect was so strong during the Great Depression that the entire market crash took place over weekends, from Saturday’s close to Monday’s close. The stock market actually rose on average every other day of the week (Jacobs & Levy, 1988). It was found that stock market returns for the days previous to holidays are significantly higher than returns for other days (Lakonishok & Smidt, 1987) While Pre-holiday and other day’s returns differ significantly, preholiday returns differ by holiday, firm size, and day of the week on which the holiday falls. Various theories have been proposed to explain the type of return generating process nearby holidays. Since holidays are often considered another type of market closing similar to weekends that means it’s appear sensible that an elucidation for one help clarify the other. For example, if the weekend effect have be explained by conclusion actions, then this case is relevant because holidays can delay conclusion for up to two days and have an effect on returns up to a week previous to the holiday (Pettengill, 1989)

Holiday differences appear fairly constant over time. In the most recent decade, however, pre-holiday returns have not been exceptional. But the effect does not appear to be a statistical object. The settlement process discuss as a potential explanation for the day of the week effect has complex implication for fluctuations in value around holidays. For example this theory predicts a high Thursday return proceeding a Friday holiday, which is what occurs. But it forecast a lower than average Friday return preceding a Monday holiday, and this is not consistent with practical results. Moreover, the size of any value changes occurring because of settlement procedures is much too small to account for the holiday effect. Abnormal pre-holiday returns are not attributable to increased risk (Husain, 1998).

Another perspective is afforded by holidays not associated with market closings, like St. Patrick’s Day or Rosh Hashanah. Such days do not experience abnormal returns. The absence of abnormal returns may be due to the lack of a trading break or to a lower level of event than that associated with major market holidays (Jacobs and Levy, 1988). One of the puzzling empirical findings reported in recent studies is the presence of abnormally high stock returns on the day before holidays (Kim & Park, 1994).

The aim of the study is to observe the Effect of Calendar Holidays on Stock return. Stock return is higher before holiday or after the holiday. This Study is observing on Karachi Stock Exchange (KSE). The Karachi Stock Exchange is a stock exchange situated in Karachi, Pakistan, established on 18 September, 1947 it started with 5 companies with a capital of Rs. 37 million. It is Pakistan’s biggest and oldest stock exchange, with a lot of Pakistani as well as overseas listings. The market develops a representative index was needed. In poor political condition, social issues, financial and other problems, KSE play a fundamental role in the economy of Pakistan. Karachi stock exchange 100-index shows a return of 40.19% and became the sixth best markets in the year 2007. On the other hand, the raise of 7.4 percent in 2008 build-up the best performer in all the emerging market. The KSE 100TM Index closed at 9645 points on 19 June, 2010. (Safi & Faisal, 2008).

Karachi Stock Exchange 100 Index (KSE-100 Index) is a stock index acting as a standard to balance prices on the Karachi Stock Exchange (KSE) over an era, age, phase of time. In formative representative companies to calculate the index on, companies with the maximum market capitalization are selected. On the other hand, to ensure maximum market representation, the company with the maximum market capitalization from each sector is also incorporated. Karachi Stock Exchange is the leading and most gooey exchange in Pakistan.

1.2 Statement of problem

To find the Effect of Calendar holidays on the stock return.

1.3 Research Hypothesis

Stock returns on the day before holiday is higher than the day after holiday.

1.4 Outline of the Study

The respite of the paper is structured as follows. Chapter 2 describes the Literature review used for the study. Chapter 3 discusses Research Methods where to define the calander holiday and using paired sample T-test. Research provides descriptive statistics and paired sample T-test analyses to analyze effect of holiday on stock return. In chapter 4 provide empirical findings and result of calendar holidays effects. Chapter 5 provides closing summary of our conclusion on calendar effects in the Pakistani stock market.



Money balances are merely one of a number of highly liquid assets which the individual may consider as part of his liquidity portfolio evaluated by the sum of financial and real assets. A steady rate of growth in the money stock matched with real growth in economic yield has generated no serious longer-run liquidity. One was expected the demand for liquidity balances to rise as real output and, in return, incomes rises. Under this situation, one may think as to the forces generating general asset price modification. Possibly such alterations were be associated to the economic viewpoint, emotional pressures, and altering inclination amongst investors for financial assets. In addition, these forces were be unlinked to money stock (Abraham & David, 1994).

When the economy’s money supply rises, investors come across that the money portion of their assets is too huge and effort to regain the wanted portfolio mix by purchasing other assets such as stocks, compelling their prices to increase. Former research on seasonality has found a relationship between the seasonal patterns of stock returns and firm size. It has found that the weekend effect is greater for small-firm stocks than for large-firm stocks. Based on the relationship of the above mentioned effects with firm size there are some possible explanations for these seasonal patterns have been proposed in the finance literature. In relation to the holiday effect, systematic patterns in investor buying and selling behavior explain the unusually high returns observed on the trading days previous to holidays. If closing prices two days before the holiday tend to be recorded at the bid while closing prices on the trading day before the holiday are recorded at the ask, then these logical patterns were produce high returns observed on the trading day previous to the holiday. If this is true and then the trading pattern were be more important for small firm stocks since the relative bid-ask spread is larger for these stocks (Kim & Park, 1994)

Small firms outperform large ones both on January and non-January preholidays. On the contrary, finds that there are no incremental preholiday returns accruing to small firms after adjusting day-of-the-week effect and excluding New Year’s Day. To resolve this difference of findings, this paper investigates whether the holiday effect persevere across size decide set (Kim & Park, 1994).

The study of the U.S. stock market shows that the holiday effect exists uniformly across all three major markets and size deciles portfolios. A natural question that arises is whether the holiday effect is present in the stock markets of countries that have different holidays and institutional measures. If the holiday effect exists across countries in unkindness of the differences in holidays and institutional measures, the results were drop more light on possible causes of the holiday effect (Kim & Park, 1994).

The study of holiday effect is observed in the U.S. S&P 500 index returns for the 1972-1987 periods. The holiday effect is also indication in the Japanese market for the same period. The mean return on the trading day before Japanese holidays is 0.1897 percent whereas the mean return during ordinary days is 0.0435 percent. The results of both the t- test and non parametric median test exhibit that the difference of the mean and median returns between preholidays and ordinary days is statistically significant. For the U.K. FT 30 index, the average return on the trading day before the U.K. holidays is 0.2228 percent, which is five times as much as the ordinary daily mean return of 0.0397 percent. However, the f-statistic for the difference of the mean returns between preholidays and ordinary days is slightly significant (p-value = 0.104), whereas the nonparametric test statistic exhibits a significant difference of the median returns between preholidays and ordinary days. The low r-statistic for the U.K. holiday effect have be due to larger standard deviation of the U.K. stock market returns and fewer observations of the U.K. holidays relative to the U.S. and Japan (Kim & Park, 1994).

There are many empirical studies that provide indication of international linkages of daily stock market returns. Also the worldwide evidence of the day of the week outcome indicates an association between the stocks returns patterns of the U.S. and other markets. Related to the international linkages of stock markets the holiday effects in the U.K. and Japanese markets are related with the U.S. holiday effect (Kim & Park, 1994).

Despite the much higher return, the pre-holiday variance of return is no larger than the return variance for all other days; means and variances do not increase proportionately, as were be the case if the pre-holiday mean return, which is 9 to 14 times the mean for the other days, resulted from 9 to 14 “regular” days somehow compounded into one day. Rather, it seems an extra component of return is added to a regular trading day. Indeed, not only is the pre-holiday variance no greater than the variance for other days, the pre-holiday variance is actually lower than the variance of non- pre-holidays. This fact serves to emphasize that the high pre-holiday return is not a reward for bearing extra risk (Ariel, 1990).

Significant portion of the total twenty-year cumulative return earned by the market index can be recognized to the returns earned on pre-holidays. The mean pre-holiday return exceeds the mean return for all non-pre- holidays by factors of 9 and 14 for the equally and value weighted indices. Therefore the eight pre-holidays collectively equal 72 or 112 non-pre- holidays in their impact on annual returns. Since there are 251 trading days in the average year, holiday returns was constitute an insignificant fraction of the total return accruing to the indices. High returns predominate only on the single trading day previous holidays and not on other days around the holiday period (Ariel, 1990).

It has been observed that the period of January high returns in fact starts on the last trading day of December. This day is the trading day prior to the New Year and is thus one of the pre-holidays included in the above tests. Hence, the high January effect return on the pre-holiday before New Year’s may be partially responsible for the statistical significance of the tests reported (Roll, 1983).

Pre holiday return is the difference between the close to close prices for the calendar days previous to the holiday. The post holiday return is a two day return which is the difference between the closing price of the calendar day previous to the holiday and that of the day immediately following the holiday. The non holiday return is the return over a one day period, without days surrounding holidays (Chan & Jinwoo, 1994).

The distinction between trading and non trading returns provides impending as to whether the higher return is associated only with trading in the market, or is a result of valuation at any rate of trading. This is the fact that the non trading return is also higher than usual may suggest the need of higher non trading returns to persuade traders to hold inventories over non trading periods. Since the higher pre holiday return goes beyond the impact of demand and supply of market trading, it implies that there is a valuation component in the higher return that does not depend on whether the trading takes place previous to holidays. Holidays when exchanges are closed may be considered another form of market closing, like weekends. Thus, higher returns previous to holiday closings are related to higher returns before the weekend and before the end of the day. To examine the holiday effect in the absence of the holiday closings, Researher compare the pre holiday returns for holidays when exchanges are open with the non holiday returns (Fabozzi & Briley, 1994).

Unlike other calendar time seasonalties, a holiday effect, if there is one, has be area definite. That is, a holiday is relevant only to the country or region where it is celebrated. Assets traded on the world markets around the clock most probably has be less affected by holidays unique to the United States, for example. The numerous international futures contracts in our sample allow us to test the significance of the holiday effect when assets are traded beyond borders or time zones. Addition of the trading hours has alleviate some of the unique trading pattern attributable to the information definite to a certain area (Osamah & Al-Khazali, 2008).

The distinction between international futures contracts and domestic futures contracts gives further insight into the merit of various hypotheses. While not prevent other possibilities, for international futures contracts where U.S. trading is not exclusive the portion of the higher pre holiday return resulting from inventory adjustment has be small, because the inventory risk over a non trading period is less for international futures contracts. At the same time, the portion of positive post holiday returns related with the favorable psychology has be conserved even in the case of internationally traded futures contracts. In the futures market, there is a considerably higher return for the day previous to a holiday. Since the positive holiday effect is associated more with the domestic exchange closed holidays, this were imply that the return effect may be linked to the stock adjustment method associated with market closings. It appears that investors are more unenthusiastic to take point, especially short point instantly before holidays (Fabozzi & Briley, 1994).

Apart from these two main seasonal effects, there are others like the December end Holiday effect finds that the pre-holiday returns are usually large. Then there is the turn of the month effect where returns are found to be higher around the end of the month. The Friday the Thirteenth effect suggests that returns on these days is negative as compared to other Fridays. The negative returns for the spring and fall daylight savings time weekend returns found are not reliable and significant (William, 1994).

Holiday effects are not new to the published literature. The holiday studies find increased returns during the day before a holiday period in many major markets. A response after the holiday is not found. While the holiday effect is well recognized, what has not been recently examined is the current relationship of one exchanges holiday to other exchanges. The present study examines the dealings of all exchanges upon the return to trading and includes six major exchanges (Japan, Australia, Hong Kong, London, Canada and the USA). The large number of inter relationships subjective by differences in time zones attached with the use of daylight and overnight returns are especially insightful. (Armand, 1999).

Using daily data on a value-weighted index of all shares in the Netherlands (1981 to 1998) found abnormally high returns in the second half of December and around the month and negative returns and higher instability on Monday. It was found an April effect for Ghana stock prices contrary to the usual January effect. It has confirmed the existence of seasonality in stock returns in India and the January effect and that the capital market in India was wasteful, and hence, investors can time their capital investment in Indian stock market to improve returns. However, the magnitude of the January effect depends upon the country and the composition of the index (Hawanini and Keim as reported by Marquering, 2002). Though the end of year effect is more distinct for small firms’ stocks and as a result for equally weighted indices, it is also present in value-weighted indices (Marquering, 2002).

Aswath (1989) is consistent evidence that returns on Mondays are more negative than returns on any other day of the week. French (1980), examining daily stock returns between 1953 and 1977, notes that the mean return on Monday was negative and lower than the mean for any other day of the week during 20 of the 25 years. Keim & Stambaugh (1984) find negative Monday returns for the S&P 500 as early as 1928 and for firms of all sizes. Rogalski (1984) offers proof that much of the Monday effect between 1974 and 1983 was due to the price change between the close on Friday and the open on Monday and was so actually a weekend effect. Smirlock & Starks (1986) using hourly values of the Dow Jones Industrial Average over the 1963-1983 period wind up that the weekend effect has shifted from illustrate active trading on Mondays to illustrate the non trading weekend. Harris (1986) finds proof of a size effect in weekend returns using transaction data, with much of the negative returns accruing between Friday close and Monday open for large firms and between Friday close and Monday close for smaller firms. While the weekend effect may be too small to give rise to profitable trading policy, it cannot be easily clarified away. French compares Monday returns with returns after weekdays which are market holidays and wind up that the Monday returns are caused by some weekend effect rather than by a general closed market effect. Keim and Stambaugh find negative Monday returns using bid prices on actively traded OTC stocks and, therefore, reject expert related explanations. One hypothesis for the weekend effect is that firms release bad news toward or after the close on Friday because they fear panic selling on financial markets. For this to cause the negative Monday returns, there has to be a parallel market incompetence since rational investors over time, anticipate the bad news (Damodaran, 1989).

Alagidede (2008) On the other hand a emergent number of studies suggest that betas of common stocks do not sufficiently explain cross sectional differences in stock returns. Instead, a number of variables, such as firm size, ratio of book to market, and price/earning ratios, that have no source in extant theoretical models, seem to have significant predictive ability. For example, Basu (1977) and Banz (1981) found that the ratio of price to earnings and market capitalizations of common equity, respectively, provided significantly more descriptive power than beta. Also, stock returns are found to be systematically higher or lower depending on the time of the day or day of the week or may be month of the year and final on Holidays (Alagidede, 2008).

The month-of-the-year and turn-of-the-month effect postulates that returns are estimated to be higher in the month of January, and especially, in the first few trading days of the month than other months of the year. Over the years, evidence show that returns observed on days previous a public holiday are on average many times greater than returns on other trading days (Alagidede, 2008).

William, Don & Robert (2006) said that regularities in stock returns, otherwise known as calendar anomalies (effects), have occupied experimental research on asset pricing models for nearly half a century, and present an inconsistency in experiential finance: The realities shed hesitation on the validity of asset pricing models and hence challenge the belief in stock market efficiency. For case, investors have buy stocks on days (months) with unusually low returns and sell on days (months) with unusually high returns. Further, if the pre-holiday effect holds, it is possible to work out strategies that were yield returns over and above buy and hold. These were being inconsistent with the efficient markets hypothesis. But as their discovery seasonal patterns in stock returns have failed to yield consistent returns over and above buy and hold strategies (Alagidede, 2008).

Trading rules resulting from the outlook of anomalies (effect) had more than offset by the round trip transaction costs and illiquidity. Thus small calendar specific anomalies need not abuse any arbitrage circumstances. Further, it has been argued that even if there are no calendar specific effects, an extensive search (mining) over a large number of possible seasonalities is likely to yield something that appears to be an ‘anomaly’ by clean chance (Burton, 2003).

For nearly half a century of their discovery in markets world wide, there has been little evidence regarding African markets. The novelty of the paper rests on the following: (a) test for the existence of two calendar anomalies in African indices— month-of-the-year and pre-holiday effects. African markets have a variety of institutional features that differentiate them from one another and from the markets in industrial and other emerging economies. The search for seasonality or other anomalies in the returns of African markets can provide important information on the role of institutional features on return behavior. This information may help stock exchange and regulatory authorities when they make policy decisions; (b) the paper explicitly accounts conditional heteroscedasticity in the month-of-the-year effects. (c) the question of whether trading rules can yield profits over buy and hold by exploiting seasonal patterns is explored (Alagidede, 2008).

A several factors are attributed to the optimistic sentiment in Pakistan’s stock market throughout the last seven years (2000-07). These factors include: fast privatization practices of government owned enterprises, attract foreign investors in important organizations, like Pakistan Telecommunication Company Limited, Electricity Supply and National Refinery and so on, allowing foreign investors to send their funds without any constraint; decrease in the interest rates by the banks; continuous development in economic essentials and higher industrial growth. These aspects are attached with different rules and laws, were introduced mostly for the security of the small investors, and to get efficiency in trade by computerization and restriction insider trading. These methods were taken besides reinforcement the structure of the Security Exchange Commission of Pakistan (SECP). These significant developments and measures have put in to the extraordinary growth in Pakistan’s equity market throughout the last several years (Safi & Faisal, 2008).

The negative returns over weekends to transfer in the broker’s shareholder balance in decision to buy & sell. During the week, investors, too busy to do their personal research, tend to follow the advice of their brokers, advice that are skewed to the buy side. On the other hand, on weekend’s investors, free from their personal work as well as from brokers, do their personal research and tend to reach decisions to sell. The outcome is a internet excess supply at Monday’s opening. It is supported by proof showing that brokers do tend to make buy recommendation, by proof that odd-lot dealings tend to be net sales, and by data showing that odd-lot volume is mainly high and institutional volume is mainly low on Mondays. Thus, individual investors tend to sell on Mondays when the shortage of institutional trading decrease liquidity. An additional explanation for the negative weekend effect is that share prices close “too high” on Fridays or “too low” on Mondays. One alternative attributes uncommonly high Friday closing prices to settlement delay. The delay among the trade date and the settlement date charge an interest-free loan until settlement. Friday buyers get two additional days of free credit, creating an encouragement to buy on Fridays and pushing Friday prices up. The decline over the weekend reflects the removal of this incentive. Friday is the day with the best volume and with the mainly positive stock returns. Karachi Stock Exchange is word as high risk high return in market where shareholder, investors and depositor seek high risk premium. During early nineties the non-informational factors apply greater pressure on stock market activity in Pakistan (Hossain, 1990). The primary cause for stock market declining with tight money and high interest rates, apart from the final effect on corporate earnings, is the fact that all financial assets are substitutes, at least to some extent. All the other things being alike, Increase in interest rates was give some investors opportunity to sell stocks and buy fixed income securities. The function of the stock market, in put out modifications in monetary policy to the “real” variables in the economy, is becoming broadly acknowledged among economists of both schools of thought. It is a concept worth deliberating in shaping investment timing strategy (Barclay & Warner, 1993).

Though economic methods have been practiced with a level of success in studies of controllers of individual common stock prices, fairly little attentions has been given to the use of these methods in foretelling shorts run movements in collective indices of common stock prices. This deficiency of attentions is not shocking since precise forecasts of the average degree stock prices are of clear and practical importance for knowing the timing of stock markts investment ideas. In aaddition, econometric forecasting methods have the significant advantage that they produce upshots that are objective and quantitative and be constantly imitated (Berkman, 1978).

The definition of holidays varies among researchers. One definition looks at days, other than Saturday or Sunday, upon which the market is closed (Lakonishok & Smidt, 1988). Alagidede (2008) on the other hand, this prohibit exceptional events such as the end of apartheid in South Africa, the recent widespread political crises in Kenya that caused the market to close to traders, and natural disasters like hurricanes, etc which can cause unexpected shutting of markets. Moreover, some holidays e.g., Easter and most religious holidays which follow the lunar calendar change over time. To this end, it defines the holiday effect as the return from the pre-holiday close to the post-holiday close. In other words, the holiday returns are the daily returns for the trading weekday that follows a non-trading weekday. Calendar effects are now accepted stylized facts in stock markets world-wide. However, the research on African stock markets regarding this issue is virtually non-existent. The pre-holiday effect is only significant for South Africa. There are high and significant returns in days previous a holiday (Alagidede, 2008).



3.1 Method of Data Collection

Method of data collection was Secondary. Stock returns data was taken from the KSE website and business recorder website. Research was takes an average return of KSE100 index companies composite by day after the holiday period covering past 5 year. The Companies listed gets from Karachi Stock Exchange website in KSE 100 index.

3.2 Sample size

Research has a total sample size of 3944 for the analysis. The main research data set is used in this thesis consist of KSE 100 index listed on Karachi Stock Exchange. It is the past 5 year data was available on the Karachi Stock Exchange Website. Data was collected through the website and business recorder website. Data was taken on the average return of KSE 100 index companies composite by day after holiday period covering past 5 years. The companies listed gets from Karachi Stock Exchange website in KSE 100 index.

The holidays considered are those which can provoke stock market closings. These are the list of the state and a public holiday of Pakistan is as follows:

Pakistan Day 23rd of March

Independence Day 14 th of August

Labour Day 1st May

Defence of Pakistan Day 6th September

Centennial of the Death of Quaid-e-Azam, Mohammad Ali Jinnah, September 11

Birthday of a Nationwide Poet, Allama Iqbal 9th November:

Christmas Day for Christians on 25th December. This day is also prominent as the birthday of Quaid-e-Azam.

Some of the holidays at Pakistan are following, they are religious holidays as follows:

Eid ul Adha


Eid ul Fitr

Jumuah tul Wida

Eid e Milad un Nabi

Laylat al Qadr

Holidays in Pakistan are celebrated all over the nation with spectacle, respect and correct celebrations.

3.3 Sampling Technique

Convenient sampling technique was used in this research

3.4 Statistical tool used

The technique of paired sample correlation was used. To find out the correlation is positive or not. The paired sample correlation for the before and after stock returns have significant value which is less than 0.05 that is 0.000 it means that correlation exists among the pairs.



4.1 Findings and interpretations of the result

H1: Stock returns on the day before holiday is higher than the day after holiday

Table 4.1

The above table shows the paired sample correlation for the before and after stock returns. The significant value of the above table is less than 0.05 that is 0.000 it means that correlation exists among the pairs.

Table 4.2

The above table shows the descriptive statistics of the data that is used for the analysis. Research has a total sample size of 3944 for the analysis. That mean value of the before holiday stock returns is 0.7082 and the mean value of the after holiday stock return is 0.2201. Here researcher observe that the mean value of after stock returns is comparatively low as compare to the mean value of before stock returns. The standard deviation shows the higher value that is 1.84191 representing the high volatility in the stock returns.

Table 4.3

According to the above table the mean difference value of the before and after holiday stock returns is 0.48809 that is positive it means that the average stock return on the day before holiday is higher as compare to day after holiday. The significant value of the test is 0.000 that is less than 0.05 it means that that our null hypothesis is not rejected. On 95% confidence interval level research can state that the stock returns on day before holiday is higher than the day after holiday.

4.2 Hypotheses Assessment Summary






Stock returns on the day before holiday is higher than the day after holiday


Not Rejected



5.1 Discussion

Stock market plays an important role in the economic development of a country. Stock exchange performance has attained significant role in global economics and financial markets, due to their impact on corporate finance and economic activity. For instance stock exchanges enable firms to acquire capital quickly, due to the ease with which securities are traded. Stock exchange activity, thus, plays an important role in helping to determine the effects of macroeconomic activities. The Karachi stock exchange has played a very significant role in the economy of Pakistan. Karachi Stock Exchange 100 Index (KSE-100 Index) is a stoc

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