Examining the holiday effect on the stock market returns: evidence from the Nairobi Securities Exchange

Abstract

Stock market efficiency remains a central concern in financial economics, particularly in frontier markets where market frictions and trading interruptions can generate predictable return patterns (Fama, 1970; Lo, 2004). This study examines the effect of holiday trading on returns at the Nairobi Securities Exchange (NSE), focusing on scheduled and ad hoc public holidays and the persistence of these effects. The analysis is grounded in the Efficient Market Hypothesis, Adaptive Market Hypothesis, and behavioral finance, which collectively suggest that market efficiency may vary across time and conditions. Using daily NSE All Share Index data from 2019–2025, the study applies event study methodology to estimate abnormal and cumulative abnormal returns, complemented by robust OLS, EGARCH (1,1), and quantile regression techniques. The results indicate that baseline holiday effects are statistically insignificant, supporting weak-form efficiency in normal periods. However, regime-specific analysis reveals a significant negative effect for ad hoc post-holidays during the COVID-19 crisis, consistent with evidence that market stress can amplify anomalies. Volatility findings show asymmetric responses to shocks, while quantile regression results demonstrate that holiday effects during the crisis are concentrated in the lower tail of returns, indicating heightened downside risk. The findings suggest that while the NSE exhibits general efficiency, temporary inefficiencies emerge during periods of disruption, particularly around ad hoc holidays. These results provide important implications for policymakers regarding trading interruptions and for investors managing risk in frontier markets.

Keywords: Stock market efficiency; Holiday effects; Ad hoc trading interruptions; Volatility dynamics; Nairobi Securities Exchange