An Examination of the day of the week anomaly in the Kenya shilling/ us Dollar Foreign Exchange Market

Abstract

The primary objective of this study is to assess the day of the week effect in the Kenya Shilling versus Us Dollar foreign exchange market using data over the period, July 2, 2007 and June 29, 2012. An investigation of the day of the effect in returns should also consider the day of the week effect on volatility. The study uses the GARCH (1, 1) framework to estimate the presence of such day of the week effect in the mean and volatility of the foreign exchange returns. Both the return and volatility equations are given. E-views (5) program was used to analyze the data. The summary statistics reveal that the average returns and standard deviation on each day of the week varies. This implies exchange rate overshooting and undershooting, though this is just a mere statistical aberration as we do not find sufficient evidence supporting the day of the week effect. However there are signals of the Tuesday effect on the volatility equation. The absence of the day of the week effect has implications on the foreign exchange market efficiency.