A test of turn of the month effect at the Nairobi securities exchange

Abstract

The turn of the month effect is a stock market anomaly in which the mean stock return is higher during the first half of the month and lower during the latter half of the same month. This is a critical departure from the Efficient Market which asserts that stock markets are efficient. One such stocks markets in the Nairobi Securities Exchange. This research was therefore conducted to ascertain whether the end of the month anomaly is present in stocks traded on the NSE. The objective of this research was establishing the existence of the turn of the month effect in the common stocks of companies listed on the Nairobi Securities Exchange. This research was time series analysis based on the firms listed on the NSE between January 2008 and December 2012. The research covered 58 firms listed firms. The raw secondary data for this research was collected from the electronic database of the NSE. Wednesday prices and the dividends were used to generate Wednesday returns across the period of study. Returns on Wednesdays at the end of the month made the dependent variable. The arithmetic mean of the remaining Wednesday returns of each month made the dependent variable. The research established that: first the returns at the end of the month did not adhere to the normal distribution; secondly, the returns of the rest of the month were not normally distributed; thirdly, the regression results showed that intercept term was positive and significantly different from zero; fourthly, the coefficient of regression was positive but not statistically significant. The whole regression was not statistically significant and the explanation of the variation in the end of the month was poorly explained by the variation in month average returns. The research found the turn of the month effect non-existent on the NSE. The study, therefore, makes the following recommendations: trading companies and the NSE should be careful about information reaching traders about the companies whose stocks they trade in; the turn of the month does not affect returns on the NSE; information efficiency should be made even better so that Kenyans get timely and material information about stocks they trade in.