The turn of the month effect at the Nairobi securities exchange

Abstract

Based on the positive expected risk-return relationship of the traditional finance theory, the study proposes that the seasonal effects are caused by systematical monthly arrival of scheduled macroeconomic news announcements on specific days of each month. In the context of financial markets, calendar effects, that contradict the EMH, have been documented over several years. These calendar effects are trends seen in stock returns, where the returns tend to rise or fall on a particular day or month as compared to the mean. The objective was to investigate whether stock returns on the Nairobi Securities Exchange depicted a turn-of-the-month effect. Descriptive research design was used in this study. The data consists of past series of stock prices for 20 companies whose shares formed the NSE- 20 share index over the period July 2003 to June 2013. Secondary data was obtained from the Nairobi Securities Exchange library. Data used in the study included daily closing prices of NSE indices such as NSE all share prices index (NSI), NSE general index (NGEN) and NSE 20 index (NSE 20) for a period of 10 years. Data was subjected to a series of different tests; parametric and non parametric tests. Independence of share price returns was tested using the following tests; serial correlations test (also known as auto correlation) and run test. The study found that the turn-of-the-month effect occurs among both high- and low-price stocks and with indices. This analysis demonstrates that the turn-of-themonth effect is not just a variation of the high returns historically earned by small-cap stocks. Regardless of market capitalization, NSE equities earn the bulk of their returns over the four days beginning one day prior to and ending three days after the end of the month. The turn-ofthe-month effect in equity returns poses a challenge to both “rational” and “behavioral” models of security pricing. The study recommends that investors should consider selling their securities at the end of the month to ensure they get high prices. Monthly performance evaluation should be done. Fund flow statement should be prepared periodically. Cost audit should be done continuously.