Turn of the month effects in the foreign currency market: evidence from Kenya
The objective of the study was to investigate existence of turn of the month effects in the performance of the Kenya Shilling in the Kenya foreign currency market. Using the event study methodology and covering a period of ten years, the US Dollar, the Euro and the Hritish Pound exchange rates to the Kenya Shilling were analyzed. The ten years period of study was subdivided into 240 sub period where half represented Turn of the Month (TOM) and the other half was Rest of the Month (ROM). TOM was defined as the last five working days of the month plus the first three working days of the following month. All other days of the month were defined as ROM. The constant mean return was used to derive excess returns at the TOM for each of the three currencies. The aggregate excess returns for the US dollar were 5%, the British pound recorded 11 % while the Euro reported 31 %. The excess returns at the turn of the month for the US dollar, the Euro and the British Pound were higher at the turn of the month compared to the rest of the month. However these excess returns were not significant and therefore cannot be exploited by market participants to make superior returns consistently. In the case of the performance of the Kenya shilling to the Euro it was found that the excess returns were significant and therefore investors can make excess returns consistently at the turn of the month compared to the rest of the month. The study concluded that the performance of the Kenya shilling in the foreign currency market is affected by the turn of the month in Kenya. Limited studies have been conducted in time related behaviour of the Kenya shilling in foreign currency market. It is therefore suggested that similar studies are conducted using other models, methods or different time periods to confirm or critic the findings of this report.
University of Nairobi, Kenya