The day-of-the-week effect as a risk for hedge fund managers
The day-of-the-week effect is a market anomaly that manifests as the cyclical behaviour of traders in the market. This market anomaly was first observed by M.F.M. Osborne (1959). The literature distinguishes between two types of cyclical effects in the market: the cyclical pattern of mean returns and the cyclical pattern of volatility in returns. This dissertation studies and reports on cyclical patterns in the South African market, seeking evidence of the existence of the day-of-the-week effect. In addition, the dissertation aims to investigate the implications of such an effect on hedge fund managers in South Africa. The phenomenon of cyclical volatility and mean returns patterns (day-of-the-week effect) in the South African All-share index returns are investigated by making use of four generalised heteroskedastic conditional autoregressive (GARCH) models. These were based on Nelson's (1991) Exponential GARCH (EGARCH) models. In order to account for the risk taken by investors in the market Engle et al's, (1987) 'in-Mean' (risk factor) effects were also incorporated into the model. To avoid the dummy variable trap, two different approaches were tested for viability in testing for the day-of-the-week effect. In the first approach, one day is omitted from the equation so as to avoid multi-colinearity in the model. The second approach allows for the restriction of the daily dummy variables where all the parameters of the daily dummy variables adds up to zero. This dissertation found evidence of a mean returns effect and a volatility effect (day-of-the-week effect) in South Africa's All-share index returns data (where Wednesdays have been omitted from the GARCH equations). This holds significant implications for hedge fund managers as hedge funds are very sensitive to volatility patterns in the market, because of their leveraged trading activities. As a result of adverse price movements, hedge fund managers employ strict risk management processes and constantly rebalance their portfolios according to a mandate, to avoid incurring losses. This rebalancing typically involves the simultaneous opening of new positions and closing out of existing positions. Hedge fund managers run the risk of incurring losses should they rebalance their portfolios on days on which the volatility in market returns is high. This study proves the existence of the day-of-the-week effect in the South African market. These results are further confirmed by the evidence of the trading volumes of the JSE's All-share index data for the period of the study. The mean returns effect (high mean returns) and low volatility found on Thursdays, coincide with the evidence that trading volumes on the JSE on Thursdays are the highest of all the days of the week. The volatility effect on Fridays, (high volatility in returns) is similarly correlated with the evidence of the trading volumes found in the JSE's All-share index data for the period of the study. Accordingly. hedge fund managers would be advised to avoid rebalancing their portfolios on Fridays, which show evidence of high volatility patterns. Hedge fund managers are advised to rather rebalance their portfolios on Thursdays, which show evidence of high mean returns patterns, low volatility patterns and high liquidity.
Showing items related by title, author, creator and subject.
Weilbach, Johannes Theron (North-West University, 2007)Limited scientific research regarding the effectiveness of Adventure-Based Experiential Learning (AEL) as an instrument to develop personal effectiveness exists. Furthermore, little attention have been given to factors ...
A methodology to investigate the contribution of conduction and radiation heat transfer to the effective thermal conductivity of packed graphite pebble beds, including the wall effect De Beer, M.; Du Toit, C.G.; Rousseau, P.G. (Elsevier, 2017)The effective thermal conductivity represents the overall heat transfer characteristics of a packed bed of spheres and must be considered in the analysis and design of pebble bed gas-cooled reactors. During depressurized ...
Prettejohn, Brendan; Van Vuuren, Gary (Taylor & Francis, 2016)The effect of different-shaped yield curves on the effectiveness of bond immunisation was investigated. Bonds were priced using historical yield curves of various shapes and simulated interest rate shocks applied. The ...