An Investigation of the Day-of-the-Week Effect in Korea: Has the Anomalous Effect Vanished in the 1990's?

ABSTRACT This study examines the day-of-the-week effect in the Korean Stock Price Index using the OLS as well as the GARCH model during the eight-year period beginning in 1990 as well as during the entire decade of the 1980's. During the 1980's, the day-of-the-week effect is found to be robust and its presence is observed irrespective of the methodology employed. In the 1990's however, the said effect has completely vanished on the Korean Stock Exchange and this finding also is not affected by the methodology used. JEL: C44, C81, F23, 053 Keywords: Day-of-the-week effect; Korea; Anomaly; GARCH I. INTRODUCTION Most equity markets in Asia have experienced roller-coaster rides in the 1990's. The Korean Stock Exchange is no exception. Table 1 exhibits the prices and volumes on the Korean Stock Price Index (KOSPI hereon) in the first eight years of the 1990's. During this period, the highest daily closing of the index was on November 8, 1994 at 113 8.75. In about 37 months after that day, on December 12, 1997, the KOSPI closed at 350.68. Thus, in the first eight years of this decade, the Korean stock market experienced a negative average daily return. In contrast, over the decade of the 1980's, the KOSPI rose from 100.15 to 909.72, a nine-fold increase. In that period, the index registered gains in 8 of 10 years. This dissimilarity observed between the market behavior during the 1980's and the 1990's provides an interesting opportunity to reexamine the presence of the day-of-the-week effect in this developing market. Finance literature contains abundant empirical evidence of equity market indicator returns being dependent on the day of the week. For the U.S. market indicators, the documented findings point out that while the Monday returns tend to be significantly negative and lowest of the week, the returns on the last trading day of the week tend to be significantly positive. (1) Similar evidence has also been reported for other developed markets as well as for the emerging capital market indicators. A large number of these studies have relied on the OLS methodology to arrive at their conclusions. Connolly (1989) questioned this well documented effect based on the distributional properties of the data, which are not found to match the assumptions underlying the OLS technique. Moreover, Connolly also contended that the sample size could distort the interpretation of statistical tests as applied in the studies of stock return anomalies. Employing robust methods, Connolly concluded that the day-of-the-week effect may have severely weakened and probably disappeared since 1975. The findings of the most recent sub-periods in Keim and Stambaugh (1984), Rogalski (1984), Smirlock and Starks (1986) and Condoyanni, et al. (1987) indeed suggest that the intensity of this effect has considerably reduced after 1975. Recent studies by Chang, et al. (1993) and Dubois and Louvet (1996) are in agreement with the Connolly conclusions regarding the U.S. experienced. (2) In most equity markets around the world, a comparable and persistent evidence has been accumulated on the day-of-the-week effect. The empirical evidence has been documented for Finland, France, Germany, Greece, Italy, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, Canada, Australia, Hong Kong, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, and Thailand. (3,4) Two glaring exceptions have been the equity markets of Israel and Taiwan. In both of these markets, the returns are found to be positive on all days of the week for the periods studied. (5) For the market of interest, namely, Korea, Lee and Chang (1988), Kim (1988), Lee, et al. (1990), and Ho (1990) document pervasive presence of the day-of-the-week effect. (6) The lowest (negative) mean return is reported on Tuesday and the highest and significantly positive return is reported on Saturday, the last business day of the week in Korea. …

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