The day-of-the-week effect in the Nairobi securities exchange: an adaptive market hypothesis perspective

Abstract

This paper examines the day-of-the-week effect , an anomaly that contravenes the Efficient Market Hypothesis (EMH), in the Nairobi Securities Exchange (NSE) . The paper attempts to identify and explain the presence of the day-of-the-week effect in the segments of the NSE with an Adaptive Markets Hypothesis (AMH) approach. Other objectives are to identify the best time to invest and whether AMH adequately explains the effect. The paper applies an Analysis of Variance (ANOVA) model using the returns of NSE segment indices for a ten-year period. Previous studies identified the presence of the effect for the established NSE indices but not for individual stocks . The approach applied is to incorporate individual stocks in indices of the NSE segments in order to give an indication of the manifestation of this effect.This paper identifies the anomaly in three out of nine segments. The findings show that the anomaly is not stable and that the significant returns of Monday are positive, in contrast to the conclusion by the previous studies. Monday and Friday are identified as the best days to sell. A conclusion drawn from this study is that the AMH does adequately explain the day-of-the-week effect.