Anomalous behavior of stock market prices over time

Abstract

This study analyzed the anomalous behavior of aggregate stock market prices over time in the US, UK, Japan, and Korea during 1979-1986. This anomaly includes the existence of positive first-order autocorrelation for daily returns and seasonalities such as the January effect, the day-of-the-week effect, and the intraday effect. Frictions in the trading process impact upon the observed prices; the most prominent is the delay in the adjustment process of price to equilibrium level. Chapter III develops a simple model of the prices under the price-adjustment delay effect in relation to the various market anomalies. We test the proposed hypothesis using two types of indexes. Type II Index is composed of highly traded, blue chip stocks; as such it is expected to be less subject to the price-adjustment delay effect. Empirical result on the distributional anomalies showed that return variance is higher and first-order autocorrelation is lower in Type II Index returns and this phenomenon is less apparent in longer differencing interval data. The sample countries generally showed the stock market seasonalities such as the January effect, the day-of-the-week effect, and the intradady effect. Price-adjustment delays affect the seasonal anomalies as is predicted. This is, Type II Index returns showed pronounced day-of-the-week effect and January effect. A mechanical trading strategy based upon the day-of-the-week effect generally outperformed the naive buy-and-hold policy. However, the weekly patterns in the daily returns are not directly exploitable by a weekend trading strategy because transaction costs of even 1.0\% on roundtrip transaction eliminate all profits. We cannot unambiguously reject the efficient market hypothesis simply because of the presence of the stock market seasonalities. The distribution of the daily returns significantly deviated from normality. Rather, the daily returns appear to be generated by a mixture of normals distribution (e.g., the mixture of...