Anomalies in the stock returns

Abstract

A number of studies have provided substancial evidence for the existence of the anomalies in the stock returns - the firm size effect, the January effect, and the day of the week effect. Although various hypotheses have been suggested as possible explanations for the anomalies, there still remains a controversy over what cause such anomalies. As a footing to scrutinize the hypotheses, a comparison on an international level is emerging for some developed countries, because each country has a unique business environment. However, there has been little attention for less-developed and small-sized capital markets. This study makes the following contributions. First, the study investigates the three anomalies to find their persistence in Korea. This, together with the previous international evidence in the literature, indicates that the anomalies are general, world-wide phenomena. Second, the study simultaneously adjusts for possible sources of biases for the observed stock returns, which have been separately considered in the previous studies. As the amounts of the biases are significantly affected by the institutional characteristics of the stock markets, some institutional arrangements of the Korean stock market offer interesting opportunities for examining the hypotheses suggested to explain the anomalies in the literature. Some statistical issues are also considered to correct the biases. Empirical result indicates that the anomalies occur even in the absence of the suggested biases. This indicates that the anomalies are neither institutional nor statistical artifacts. Third, the study provides a more complete and detailed characterization of the anomalous phenomena by decomposing daily close to close returns into non-trading period (close to open) returns and trading period (open to close) returns for the ten portfolios constructed by the market capitalization of the firms. This enables us simultaneous analyses of both cross-sectional and intra-temporal charac...