Testing of the Day of the Week Anomaly on Foreign Exchange Rate in the Foreign Exchange Market in Kenya

Abstract

In an efficient market, prices reflect all the market information whether past, publicly held or private information. Investors should therefore expect to make only normal profits by earning a normal rate of return on their investments. There is an interesting contradiction to this hypothesis. This is the day of the week anomaly. Other researchers have called this Monday effect, Friday effect and Weekend effect. There have been observations in Finance Research that stock returns on Mondays are lower than those of other days of the week. Most of the studies done have depicted different results, more so in Kenya, where most studies conducted on the day of the week have concentrated on the stock exchange returns at the Nairobi Securities Exchange. The main objective of the study was to test the day of the week anomaly on foreign exchange rate in the foreign exchange market in Kenya. The research study made use of descriptive research design. This study used secondary data on the daily mean Kenyan Shilling/Dollar exchange rates from January 1, 2011 to December 31 2014 downloaded from the Central Bank of Kenya’s website. The US dollar is the most traded currency on the spot market and is the denominator of most business transactions and asset valuations thus selected as a representative for the study. The quantitative data collected was summarized and analyzed using cross tabulations and descriptive statistics. The study found day of the week effect is present in exchange rate in the foreign exchange market in Kenya. It was clear from these findings that Friday recorded the highest mean score than other days of the week over the period studied. The study concludes the Day-of-the-Week has no significant effect in the foreign exchange market in Kenya during the investigated period. The findings of this study suggest that companies as well as individual investors should not consider the day of the week effect in their investment decisions.