Analysis of Month of the Year Effect: Evidence from GARCH Model in Indian Stock Market
Purpose: The article investigates the stock market anomalies and volatility of returns for Indian stock market, namely, NSE comprising monthly data from January 1996 to December 2023. Design/Methodology/Approach: Simultaneously, GARCH (1,1) and EGARCH (1,1) along with OLS dummy variable technique are applied to assess the volatility of the National Stock Exchange (NSE) of India. Test for presence of ARCH effects is done before the application of GARCH models. Augmented Dickey Fuller test as well as Phillips-Perron test is conducted to judge stationary. The presence of ARCH effect is judged first and then time varying volatility clustering is ascertained by ARCH heteroskedasticity test. Findings: The result suggests that, for NSE, there exists July, November, December effect in returns while using GARCH (1,1); December effect for NSE while using EGARCH and dummy variable regression analysis. There exists asymmetric effect in NSE market, but the impact of unfavourable news (bad news) is weaker than favourable news (good news) and volatility take a very short time to die out. Evidently, ‘July effect’ is prominent in NSE suggesting novel findings as no ‘July effect’ is found in Indian stock market by any previous research studies and also November effect in case of NSE corroborates the findings of other researchers. Practical implication: This result might be valuable for potential investors in protecting their equity portfolios from unanticipated shocks and making superior investment decisions to evade big, unforeseen losses. This study also underlines crucial periods which policymakers and potential investors ought to scrutinize intensively to be aware of the economic buoyancy in Indian financial market well. Originality /Value: One very motivating result from the study is the ‘July effect’, which is in a prickly contract to several former studies conducted during their respective selected study period. This ‘July effect’ significantly appeared in NSE suggests novel findings as no ‘July effect’ is found in Indian stock market by any previous research studies. The implication of this research endeavour lies in its contribution to the greater perception of how prospective investors in India can resolve their investment decision with volatile stock market conditions.