Day-of-the-Week Effect in Fear Gauge:
Evidence from India
The IUP Journal of Applied
Samreen Akhtar, Valeed Ahmad Ansari and Saghir Ahmad Ansari
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This study tests the presence of day-of-the-week effect with respect to the VIX (fear gauge) and its underlying market index Nifty 50 in India for a period from March 2009 to February 2016 using OLS and GARCH(1, 1) framework. Investors can use the day-of-the-week effects information to avoid and reduce the risk when investing in Indian stock market. The results report the presence of strong positive Monday effect and negative Tuesday and Thursday effects in the Volatility index of India, while in the case of Nifty Monday effect is not found but a weak positive Wednesday effect is present. In order to obtain robust results, the analysis is also presented for sub-periods.
Day-of-the-week effect is said to exist if some consistent pattern is found on the certain day of the week. This effect is a form of calendar anomaly as it is not in line with the Efficient Market Hypothesis, according to which capital markets are unpredictable and hence no specific consistent patterns should exist. The existence of these anomalous patterns in the stock market makes it easier for investors to earn excess profit simply by observing certain calendar rules. For a rational investor, risk or volatility of returns is as important to take into account as returns. So, for sound decision making it is important to know whether there are variations in volatility of stock returns by day-of-the-week patterns as stock returns are commonly associated with market risks measured in terms of volatility. It is important to know whether a high (low) return is associated with the corresponding high (low) volatility for a given day. This is because such knowledge may allow investors to adjust their investment portfolio by considering the day-of-the-week variations in volatility. Investors require a higher rate of return in a more volatile stock market.
Applied Finance Journal, Day-of-the-Week Effect in Fear Gauge, Evidence from India