A factor model of seasonality in stock returns

Javier Gardeazabal and Marta Regúlez Castillo

No 1988-088X, DFAEII Working Papers from University of the Basque Country - Department of Foundations of Economic Analysis II

Abstract: Most empirical evidence on stock market seasonality is based on the Dummy Variable Approach (DVA). Typically, the DVA leaves too much variability of stock returns unexplained and inference usually leads to weak or null evidence in favor of seasonality. In this paper, we propose an extended DVA (EDVA) which leaves a lower fraction of stock return variability unexplained. We provide empirical evidence on daily seasonality in the Spanish stock market. Inference based on the EDVA finds positive and significant Monday and Friday effects and negative and significant Wednesday and Thursday effects. Extending the analysis to a model with GARCH conditional variances confirms these results and shows heavy daily seasonality in conditional variances.

Keywords: stock returns; daily seasonality; common risk factors (search for similar items in EconPapers)
Date: 2002
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Journal Article: A factor model of seasonality in stock returns (2004)
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Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain

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