Predictability Of Share Price On Stock Finance Essay

The survey of portion monetary value behavior has ever been a subject of great involvement for investors. The fact that many outstanding mathematicians, faculty members and practicians have applied their considerable accomplishments to calculating fiscal securities monetary values is a testament to the fascinating and challenges of this job. The nonrandomness of stock market returns has been the subject of legion surveies in the yesteryear. Researchs were carried out to look into whether portion monetary values were predictable by mechanical agencies or in instance any category of investors had consistent and significant success in investing affairs.

Analysts have ever been seeking to foretell the returns motions of the portion monetary values in order to plan specific trading schemes in order to harvest unnatural net income. However we noticed that these research plants have ever been connected to the anomalousnesss that happen in the stock market. The Centre of treatment has frequently been the form of the day-to-day returns or the happening of anomalous behaviors in certain peculiar month of the twelvemonth. If the anomalousnesss truly exist, it implies that investors may be able to foretell the returns and in such fortunes we will be inclined to reason that the market is non efficient.

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The purpose of this research work is to analyze the portion monetary values behaviour on the stock exchange of Mauritius, find whether it exhibits some forms or non and if so we should be able to find when it will be more likely to do extra return. By so making, it will intensify our understanding on the portion monetary value behavior and hence we shall be in a better place to do our decision on whether the stock exchange market of Mauritius is truly efficient, For the intent of our research work we shall besides turn to the construct of market efficiency in this paper.

The purpose of doing this analysis is to happen out whether calendar anomalousnesss are still present in the stock exchange market of Mauritius. This survey investigates the assorted anomalousnesss that may impact the returns viz. the ; twenty-four hours of the hebdomad consequence, January consequence and bend of the month effects. We shall compare the returns at different points in clip and pay particular attending to day-to-day and monthly anomalousnesss.

In order to run into this nonsubjective, we shall do usage of past and current informations from the stock exchange. Data will be collected on a day-to-day footing and we shall look into if there is any peculiar tendency that the returns follow. In add-on, we intend to foreground the noteworthy motions of the portion monetary values over the past 14 old ages. For the intent of analyzing the twenty-four hours of the hebdomad consequence on the Stock Exchange of Mauritius, day-to-day observations of the SEMDEX will be used. The SEMDEX being an index of monetary values of all listed portions and each stock is leaden harmonizing to its portion in the entire market capitalization. This research would non seek to invent new theories, as batch of researches have already been made on the subject, but alternatively concentrate on treatment associating to the behavior of the fiscal market every bit good as the influence of other factors on the market.

1.3 Administration of the survey

The survey is organized as follows. The first subdivision starts with an debut. The 2nd subdivision reviews the literature on the stock exchange of Mauritius, efficient market hypothesis and the calendar effects. It will besides concentrate on empirical findings on the capable affair. The 3rd subdivision describes informations beginnings and the methodological analysis used for the research work. This consists of the statistical trial that shall be used to observe seasonality. The 4th subdivision provides us with analysis and findings of the survey. The concluding subdivision consists of the decisions.

Chapter 2

Literature reappraisal


The debut of the term “ efficient market ” is normally attributed to Eugene Fama. However the construct of stock market efficiency came into trend after the work done by Louis Bachelier[ 1 ]in his PhD thesis in 1900, “ The theory of guess ” .

The efficient-market hypothesis provinces that fiscal markets are informationally efficient. A market is assumed to be efficient if it is impossible to do unnatural net incomes by utilizing a peculiar set of information to explicate purchasing and merchandising determinations. A market in which monetary values at any clip “ to the full reflect ” available information is called “ efficient ” ( Fama, 1970, p 383 ) . Fiscal market is efficient if market to the full reflects all available information at all blink of an eye. If all information is integrated in the portion monetary values, this implies that the portion monetary value should be equal to the true value of the portion. Since these two figures are the same, this means that it is impossible for an investor to bring forth above normal returns.

There are three recognized categorization of market efficiency which was indentified by Harry Roberts. The three signifiers are: weak signifier, semi strong signifier and strong signifiers and they are distinguished by information which is incorporated in the portion monetary values. The weak signifier is concerned with historical monetary values. Weak efficiency rejects proficient analysis. The semi strong signifier encapsulates the weak signifier and portion monetary values integrate all publically available information.

Finally the strong signifier includes the weak & A ; semi strong signifier and incorporates privileged information. Privileged information comprise of information accessible to market shaper and insider information available to corporate directors. However in efficient market no extra returns can be earned by merchandising on that information.

Since efficient market is a hypothesis and until a blemished hypothesis is replaced by a better one, unfavorable judgment is of limited value. In fact efficient market hypothesis is argued to be merely a theoretical construct by two schools of ideas which are the cardinal and proficient analysis. Investors use these analyses to bring out good trades in the fiscal markets.

Cardinal analysis uses fiscal and economic analysis to measure the intrinsic value of stocks, predict its monetary values and to happen undervalued portions. One of the celebrated cardinal analysts is Warren Buffett ( Oracle of Omaha ) who masters the accomplishments of stock picking and market timing. Conversely Technical analysis ( Chartism ) uses charts and other tools to place forms in stock market. They make usage of numerical series generated by market activity such as monetary value and volume to perceive monetary value tendencies.

Harmonizing to market efficiency there should be no form in the development of monetary values, nevertheless in world some forms have been noted. There are some discernible facts on stock markets that are against EMH. These phenomenons are known as anomalousnesss.

Calender anomalousnesss


January consequence is a well-known calendar consequence. It was found through empirical research that in the month of January the returns are usually higher than that of the staying months. Research workers such as Kinney ( 1976 ) , Jagadeesh ( 1991 ) provided grounds back uping to this anomaly.The two causes of January consequence are revenue enhancement loss merchandising caused by single investors and window dressing by institutional investors.

The January Effect is a consequence of tax-loss merchandising which causes investors to sell their losing places at the terminal of December. Tax-loss merchandising takes topographic point near the terminal of a calendar twelvemonth so that the loss can be used in that revenue enhancement twelvemonth to countervail additions or investing from other security minutess. Schultz ( 1985 ) recorded that revenue enhancement loss merchandising resulted in high January returns in US market. The revenue enhancement loss hypothesis even got empirical supports from Roll ( 1983 ) and Constanides ( 1984 ) .

Window dressing hypothesis provinces that institutional investors buy stocks with positive returns and sell “ loser ” securities merely before the terminal of the twelvemonth in order to show a nice portfolio at the beginning of the following twelvemonth ( Lakonishok et al 1991 ) .

Other empirical happening found by Nassir & A ; Mohammad ( 1987 ) and Balaban ( 1995 ) showed that in Malaysia and Meleagris gallopavo severally, the average January ‘s returns were significantly positive and higher than in other months. More late Swint Friday and Hoang ( 2011 ) who studied seasonality in Vietnam stock market Index documented the January consequence in that market for the ten old ages runing from 2000 to 2010. They observed that for the period 2000 to 2005 the average return for January was approximately 5.07 % and for the 2nd period 2006 to 2010 the mean return was 4.88 % . The average return which was about 4.98 % for both periods was really the largest monthly returns. Conversely, July was the lowest monthly returns with a average return of -3.26 % .

On the other manus when analysing the monthly consequence on US stock market, Moosa ( 2007 ) found that January consequence is really disappearing. He used monthly mean informations on Dow Jones Industrial Average for the period 1970-2005 and estimated a silent person variable theoretical account utilizing Ordinary least square and rolled arrested developments. He found that the presence of January consequence in earlier periods ( from 1970 to 1989 ) which later bit by bit disappeared and noticed the outgrowth of the negative July consequence ( from 1990 to 2005 ) . The T statistic for the month of January fell from 3.25 ( from 1970 to 1979 ) to 2.09 ( from 1980 to 1989 ) and decreased to 1.46 ( from 1990 to 2005 ) .Moreover in the same period the T statistic was -2.02 for the month of July compared to -1.50 in the old period.

In the same line of idea a research conducted by Fountas and Segredakis ( 2002 ) proved that the January Effect vanished for 18 emerging markets. More late Chaouachi Olfa besides investigated the being of the monthly consequence in Tunis stock exchange ( TSE ) for the period 2003 to 2008. He used arrested development analysis of silent person variable and acknowledged the April consequence in the Stock market. Furthermore he used the parametric F- statistic and the kruskal Wallis trial which were statistically important at 1 % significance degree. In add-on the ascertained highest day-to-day market returns was in the month of April with 0.192 % and the lowest was in July with -0.097 % .


There is an extended sum of fiscal literature which focuses on the twenty-four hours of the hebdomad consequence. Day of the hebdomad consequence shows that the mean day-to-day return of the market is different for all the yearss in the hebdomad. In this regard, many surveies have focussed on the Monday consequence, besides known as the week-end consequence where comparatively lower returns have been observed on Mondays compared to other hebdomad yearss.

The most likely ground for the being of hebdomad terminal consequence harmonizing to Board and Sutcliffe ( 1988 ) is the failure to calculate the monetary value connoting that investors overestimate the shutting monetary value on Fridays or underestimate value on Mondays hence taking to low returns on Mondays. Another ground for this phenomenon is due to bad intelligence being publicized after the stopping point of trading on Friday and during the weekend. So investors will readapt their portfolio and sell bad securities on Monday

Harmonizing to research workers such as Osborne ( 1962 ) and Gibbons & A ; Hess ( 1981 ) , they found that there is a inclination for stocks to give big returns on Fridays compared to those on Mondays. Similarly Gallic ( 1980 ) , Keim & A ; Stambaugh ( 1984 ) besides demonstrated that the weekend phenomenon was still present in the stock market.

More late Samer ( 2004 ) who tested the day-to-day return form in Amman stock market for the period 1992 to 2002 found the same consequence. They employed the GARCH theoretical account and used F trial to detect that for the first period 1992 to 1999, the mean returns on Monday were statistically significantly negative with a return of ( -0.08 ) at 10 % significance degree. In add-on since the mean returns on Monday was ( -0.12 ) and that Thursday ‘s returns was 0.08 for the period 1999 to 2002, they concluded that twenty-four hours of the hebdomad consequence was still present in Amman stock market.

This evident consensus is challenged by a set of more recent surveies. Demirer and Karan ( 2002 ) who made an probe on the twenty-four hours of the hebdomad consequence on stock returns in Meleagris gallopavo for the period 1988 to 1996, found that there is neither grounds of Monday nor Tuesday consequence although on Fridays the returns was higher. They analyzed the mean and discrepancy values every bit good as interpreted the T statistic, kurtosis and lopsidedness values. They concluded that Friday had statistically important returns with significance degree of 1 % . They made usage of ANOVA for a more elaborate analysis and a additive arrested development theoretical account incorporating dummy variable to analyze the day-to-day consequence. Furthermore it was noticed that the returns had symmetric distribution and displayed both negative and positive kurtosis values were close to zero bespeaking normalcy of the returns.

In add-on Aly, Mehdian and Perry ( 2004 ) besides examined the day-to-day returns for the capital market authorization index ( CMA ) index from 1998 to 2001 to prove for the Monday consequence on the Egyptian stock market. They foremost computed the day-to-day returns and so used OLS to gauge the arrested development equation dwelling of dummy variables. Furthermore they performed a difference-of-means trial of the void hypothesis to detect whether the average return on Monday is equal to the average return during the remainder of the hebdomad. They found that the difference of average trial is non statistically important with significance degree of 5 % and concluded that Monday returns are significantly positive but are non significantly different from the remainder of the hebdomad returns. They found that Monday returns besides exhibit higher standard divergences compared to the divergences of the returns during the remainder of hebdomad.

2.4 Turn of the month consequence

The bend of the month consequence was ab initio observed by Ariel ( 1987 ) describing significantly positive returns during the first yearss of the month. This consequence illustrates the inclination for stock monetary values to lift during the last two yearss and the first three yearss of each month. Some research workers attribute the consequence to the timing of monthly hard currency flows received by pension financess and reinvested in the stock market. It has been reported that macroeconomic intelligence proclamation such as the employment studies, retail gross revenues and manufacturer monetary value index have big influence on the stock market as these proclamation are being released at the beginning of the month and hence can be deemed to be the major ground for the Turn of the month consequence ( TOM ) .

TOM forms were observed in the stock market antecedently by many research workers. An illustration is Lakonishok and Smidt ( 1988 ) who found higher returns on the last trading twenty-four hours of the month and during the subsequent three trading yearss. Furthermore Cadsby and Radner ( 1992 ) identified TOM effects in six stock indices out of the 10 markets that they explored during the period 1962-1989.Agrawal and Tandon ( 1994 ) who studied the stock index of 18 states for the twelvemonth 1971 to 1987 besides detected the presence of TOM consequence in 11 states in the 1970s and in seven states in the 1980s.

Other notable survey was done by Balbina and Martins ( 2002 ) who studied the Lusitanian stock market for the period 1988 to 2001. They evaluated the returns for the last and first four trading yearss of a month denoted by Day – 4 through Day -1 and by Day +1 to Day +4. They observed that average returns were significantly positive at 10 % important degree during the old ages 1988 and 1996 every bit good as during 1997 to 2001, where positive returns were spotted on twenty-four hours -1 to twenty-four hours +3.

Kunkel, Compton and Beyer ( 2003 ) besides examined the bend of the month consequence in 19 state stock market indices for the period 1988 to 2000 utilizing both parametric and non parametric steps. They examined the day-to-day returns utilizing OLS arrested developments and T trial to analyze the difference between the 4-day TOM return and the mean 4 twenty-four hours return for the month. The 2nd trial is the three manner ANOVA theoretical account and the 3rd trial is a non parametric WSR trial which inspected the matched-paired TOM-ROM returns. Finally they identified that out of 19 states, Tom consequence was present in 15 states and that the 4 twenty-four hours Tom consequence accounted for 87 % of the monthly returns.

2.5 other grounds

Research ( 1 )

Heininen and Puttonen ( 2010 ) studied the consequence of calendar anomalousnesss on the Central and Eastern European ( CEE ) states stock market for the period 1997 to 2008. Their research work provided empirical grounds on Day of the hebdomad consequence, Month of the twelvemonth consequence and bend of the month consequence utilizing the stock market monetary value degree indices from 12 CEE states. They employed the Ordinary least square arrested development analyses to happen if calendar consequence was truly present in these selected states viz. Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia and Slovenia.

First when proving for the day-to-day returns of these states, a arrested development consisting of 5 dummy variables were being estimated. The dummy variables were the first five trading yearss in a hebdomad. Furthermore F trial was being used to prove whether the F-value of arrested development was statistically important or non. After a batch of observation they arrived at the decision that there was no grounds of the presence of any important day-to-day forms in the stock market of the CEE states.

Furthermore the same methods were being used when proving the Month of the twelvemonth consequence in these states. In this instance 12 silent person variables were being used alternatively of 5. The 12 silent person variables represented the 12 months in a twelvemonth. Finally they concluded that the most profitable months occurred during the period of October until February and that losingss aroused during the summer months from May to September.

In add-on while measuring the bend of the month consequence, they defined their event window as ( -1, 4 ) that is the last on the job twenty-four hours of the old month and the first four yearss of the approaching month. To happen whether Bend of the month consequence is still alive, they compared TOM returns to the remainder of the month ( ROM ) consequence. Last they observed that in the undermentioned states such as Croatia, Hungary, Poland, Romania, Russia, Slovenia TOM returns are higher than the ( ROM ) returns whereas in Bulgaria and Latvia TOM was lower that ROM.


Silva ( 2010 ) analyzed the effects of calendar anomalousnesss on the Lusitanian stock market for the period 1989 to 2008. He studied the Day of the hebdomad consequence, January consequence and the bend of the month consequence for 20 old ages utilizing series of trial. He employed the ordinary least square arrested development with silent persons and trials for the equality of agencies utilizing F trials and Kruskall Wallis trial. Furthermore T-test and Mann Whitney trial was besides applied.

First when proving for the twenty-four hours of the hebdomad consequence, Log returns were computed for day-to-day frequences. The OLS arrested development included five silent persons variables as independent variable and a 6th variable was added as the lagged return on the index to take autocorrelation. He concluded that for the sub period 1 ( 1989-1995 ) Monday had the lowest average return and highest standard divergence whereas Friday had the highest mean and lowest divergence. However for the sub period 2 ( 1996-2002 ) , Tuesday had the best return and Thursday had the worst. Last for the sub period 3 ( 2002-2008 ) , Wednesday had the best returns and Thursday the worst weekdays. Harmonizing to F prove the differences in weekdays was non important and therefore the being of any weekdays were non supported.

Besides the arrested development to prove the monthly consequence comprised of 12 dummy variables and one lagged return. He found that the best month for all the bomber periods was February followed by January and December. The mean good public presentation of January is entirely due to its good public presentation in sub period 2 with a average return 0.30 % whereas the sub period 1 and 3 average returns was -0.04 and -0.03 severally. February showed a worsening tendency during the three bomber periods with a average return of 0.20 % followed by 0.15 % and in conclusion 0.07 % in sub period 3. However since the consequences are non important, he arrived at the decision that there is no being of monthly effects in the stock market.

In add-on the event window ( -1, 5 ) was used to prove the Turn of the month consequence in the Lusitanian stock market. This implies that he analyzed the last twenty-four hours of a month until the 5th trading twenty-four hours of the following month. The sequence of the 6 yearss had an mean return of 0.091 % against -0.007 on other yearss ( ROM ) and harmonizing to T-test and Mann Whitney trial, these consequences were important.

2.6 Holiday Effect

Holiday consequence can be defined as a rise in stock monetary values due to an addition in purchasing activity by bargainers immediately prior to a vacation weekend. The theory behind this consequence is that bargainers are selling their stocks prior to the three twenty-four hours holiday so as to avoid any sudden bad intelligence. The merchandising force per unit area drives stock monetary values down, doing those yearss a good chance for purchasing stocks. This implies that investors are loath to purchase on pre vacations which consequences in a rise in the mean size of command orders. Surveies have shown that mean stock returns on trading yearss before public vacations are abnormally higher than day-to-day mean return. Stock returns differs form day-to-day mean return both before and after vacations. The mean return is normally high on the last trading twenty-four hours before a vacation ( Ariel 1990 ) whereas it is low on the first trading twenty-four hours during station vacation ( Gallic 1980 ; Lakonishok & A ; smidt1988 ) .

2.7 Momentum and contrarian effects

Stock monetary values motion could be due to momentum and contrarian consequence as good. The impulse anomalousness is one of the oldest academically described anomalousnesss and this consequence occurs when there is deficient reaction to predominating intelligence. Momentum is the through empirical observation ascertained inclination for lifting plus monetary values to lift farther, and falling monetary values to maintain falling. Harmonizing to Shefrin and Statmna ( 1993 ) ; Shriller ( 1993 ) this phenomenon is defined from a psychological position as “ herdlike outlook that influences stock rating ” .

On the other manus the contrarian consequence merely means that investors go against the bing market tendencies by merchandising assets that have perform ill and selling those that have perform good. The chief ground for this self-contradictory consequence is that the market as a whole tends to overreact to negative intelligence taking to temporarily undervaluation of some houses stocks which is in fact a purchasing chance ( Graham and Dodd 1934 ) . Furthermore De Bondt and thaler ( 1985 ) added that investors overreact to positive intelligence every bit good as bad intelligence ensuing in overpriced stocks. Due to these reactions contrarian investors prefer to purchase out of favour stocks and sell popular stocks.

2.8 Trending and Mean reversion

Trending is a practise of descrying a form of the portion monetary value in the stock market. It is a protraction of the upward or downward motion of the portion monetary values. Swerving is a manifestation of repeating monetary value forms in the short term while the long term is characterised by the average reversion. Average reversion is a theory which depicts return reversals phenomena. This implies that monetary values and returns finally move towards the mean, i.e. an disposition of plus monetary values to return to a tendency way. Average reversion is concerned with a state of affairs where clip series is stationary. There is assorted grounds on average reversion on stock market returns, with some grounds demoing that it is a weak consequence, while other surveies have found it to be strong plenty to be used to deduce a scheme that out-performs the market.

Chapter 3

3.1 The Stock market of Mauritius- An overview

The stock exchange market Ltd is a good regulated and structured market where the purchasing and merchandising of portions and other fiscal instruments take topographic point. It is a centralised market topographic point which consists of a modern trading and colony substructure enabling the investors to follow the market in existent clip.

The stock exchange of Mauritius [ SEM ] was established in Mauritius as a private limited company on March 30, 1989 under the Stock Exchange Act 1988 and on the 6 October 2008, SEM became a public company. The gap trading Sessionss began with five companies admitted on the Official List on the July 5, 1989.

The stock exchange of Mauritius consists of two wide sections viz. the Official market and the Development endeavor market [ DEM ] . Official market has made a singular advancement since it was launched in 1989 with a market capitalization of about 92 million. Nowadays there are 40 companies listed on the official market with a market capitalization of about US $ A 5.5 billion as atA 31A AugustA 2012.

The DEM is a rather a new market, since it was launched on the 4th August 2006. It is a market for Small and Medium-sized Enterprises ( SME ‘s ) and freshly set-up companies which want to raise capital in order to be able to run into the needed financess for their hereafter growing and better their overall corporate image. The market capitalization of the DEM stood at about Rs 54 billion as at 30 June 2010.Currently there are 47 companies listed on this market with a market capitalization of about US $ A 1.4 billion as atA 31A AugustA 2012.

The stock exchange of Mauritius comprises of three stock market indices. A stock market is merely a method of mensurating the value of a subdivision of the stock market. It is a group of stock arranged in a standardised manner so as to supply a utile window into a sector or market ‘s public presentation at a glimpse. The three stock market indices are: SEMDEX, SEMTRI and SEM-7.


The SEMDEX is an index that measures the public presentation of the stock market through the listing and analysis of all portion monetary values on the market. On the SEMDEX each stock is leaden harmonizing to its stock in the entire market capitalization. Market capitalization is the amount of the market value of all portions included in the SEMDEX. Changes in the portion monetary values of those with higher market capitalization will finally hold an consequence on the index.


The SEMTRI is a tool which enable both local and foreign market participant to mensurate the public presentation of the local market. The entire return measured by SEMTRI consists of both the capital grasp ( capital gain/losses ) and gross dividends received on these stocks. It acts as a benchmark and enables investors to set about cross-market and cross-instrument public presentation measurings.


The SEM-7 consists of the seven largest Mauritanian companies by their market value. It is steps in footings of market capitalization. The seven companies for the one-fourth get downing October 03, 2012 are: Mauritius Commercial Bank Ltd, State Bank of Mauritius Ltd, New Mauritius Hotels Ltd, ENL Land Ltd, Terra Mauricia Ltd, Rogers and Company Ltd, Bramer Banking Corporation Ltd.

SEM has associations with prima regional and international associations:

Member of the World Federation of Exchanges ( WFE )

Member of the South Asiatic Federation of Exchanges ( SAFE )

Member of the African Securities Exchanges Association ( ASEA )

Member of the Committee of SADC Stock Exchanges ( COSSE )

Designated as Recognized Stock Exchange by U.K. Her Majesty ‘s Revenue & A ; Customss

Designated as Approved Stock Exchange by the Cayman Islands Monetary Authority


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