A Trading Strategy for the Indian Stock Market: Analysis and Implications

A curious seasonality reported in finance is the monthly effect which implies that the mean daily return for stock is positive and higher during the first half of the month than the second half. Another related anomaly is the turn-of-the-month effect which is said to exist when the average daily return at the turn of the month is significantly higher than the daily return on the remain ing days of the month. This paper examines both the monthly effect and the turn-of-themonth effect in the Indian stock market by applying two different approaches: calendar day approach and trading day approach. The results of both the approaches reveal significantly higher return at the first half of the month than that of the second half and abnormally high returns at the turn of the month. Various explanations for the ob served anomalies have been considered including the problem of ‘data mining,’ proxy of other anomalies, etc., but none could provide adequate explanations for the observed intra-month return regularities. However, based on the findings, the study tries to evolve certain trading strategies which would benefit in the decision making of the investors concerned with timing of stock purchases and sales.