A Study On The Time-varying And Forming Mechanism Of The "intra-week Effect" In China's Stock Market

The "day-of-the-week effect" is one kind of calendar "anomalies" in the financial market, which is a challenge to the efficient market hypothesis and offers investors the opportunity to beat the market average return. Therefore, the "day-of-the-week effect" has been a hot topic in the financial research, and more than ten kinds of hypothesis have been raised to explain it. Though there are many evidences for it in the past paper, scholars find that its empirical results are mixed in the recent years, which is a heavy beat to the existing theories and hypotheses explaining the "day-of-the-week effect".This paper argues that the traditional "day-of-the-week effect", which generally implicitly assumes that the "day-of-the-week effect" in the total sample is fixed, is misspecified. Whether traditional financial theory or behavioral financial theory admit that investors have learning capabilities, so it is unreasonable to assume that the market investors ignore the "day-of-the-week effect" for a long time. Maybe it is the misspecified of the traditional "day-of-the-week effect" that makes it losing the power to explain the mixed empirical results.Therefore, this paper introduces the "time-varying hypothesis", proposed by Doyle and Chen (2009), to support the "day-of-the-week effect". The "time-varying hypothesis" means that, the pattern of the "day-of-the-week effect" is not fixed, but changes over time. It is a new and more powerful challenge to the efficient market hypothesis. On the one hand, it can explain the mixed empirical results effectively, which help to support the "day-of-the-week effect"; on the other hand, it establishes a whole new way that markets can be shown to be inefficient, instantly increasing the vulnerability of EMH.However, Doyle and Chen (2009) does not explain why and how the "time-varying" of the "day-of-the-week effect" happens. Therefore, firstly, the third chapter of this paper summaries and classifies the domestic study of the "day-of-the-week effect" of the Chinese stock market, and founds that the "time-varying hypothesis" can explain the mixed empirical results effectively. And then, by empirical test, this paper proves that the "day-of-the-week effect" of the Chinese stock market does have the time-varying character, which provides empirical support to the "time-varying hypothesis".Secondly, the fourth and fifth chapters of this paper, from different perspectives, fully study the formation mechanism of the time-varying "day-of-the-week effect", and then propose a theory to explain it, respectively. Specifically, the time-varying form of the "day-of-the-week effect" can be divided into three possible types, namely, convergence, gradient-type divergence and jump-type divergence, which formed because of different information diffusion mechanisms. This paper studies these respectively, and based on the empirical results, proposed two theoretical explanation for the formation mechanism of the time-varying "day-of-the-week effect", which provides the "time-varying hypothesis" a more solid theoretical foundation and empirical support.Specifically, the fourth chapter compares the efficient market hypothesis and the Bayes studying process, which correspond to the first two time-varying forms of the "day-of-the-week effect". According to the "rolling sample test", this chapter first proves that the "day-of-the-week effect" of Chinese stock market does not has a less significant trend, which means it is not convergence, and is not consistent with the efficient market hypothesis. Secondly, this chapter finds that the average return of some weekday changes with an obvious "S" shape, wandering between the highest and lowest income of the week, which means that there is an "over-reaction" to the weekday effect of the Chinese stock market. Accordingly, this chapter proposes a theoretical explanation to the formation of the time-varying of the weekday effect, based on the Bayes studying process, the "over-reaction theory" and the "herd effect" theory. Finally, according to the theoretical explanation and the empirical results, this chapter proposes some useful investment advices to the investors.The fifth chapter uses the Markov regimes-switching model to study the "day-of-the-week effect", which is the first time at home and abroad. Firstly, this chapter pointes out that the information diffusion mechanisms of MRS model responses to the last time-varying form of the "day-of-the-week effect". Secondly, this chapter analyzes the advantages and difficulties for using the MRS model to test the "day-of-the-week effect", and then proposes a solution and implements the empirical test. Finally, based on the empirical results, this chapter raises an alternative theoretical explanation to the formation of the time-varying of the "day-of-the-week effect". Meanwhile, this chapter also proposes some useful investment advices to the investors.All in all, the third chapter of this paper proposes and proves the "day-of-the-week effect" of Chinese stock market is rather time-varying than fixed; while the fourth, fifth chapter examines all the possible time-varying forms of the "day-of-the-week effect", and proposes two possible theory to explain the formation of the time-varying of the "day-of-the-week effect". And, each chapter proposes some useful investment advices to the investors, based on each chapter’s theoretical explanation and empirical results.The possible innovations of this paper are:First, by empirical testing, this article comprehensive studies the time-varying characteristics of the "day-of-the-week effect" on China’s stock market, proves that the weekday effect of the Chinese stock market is time-varying, proves it does not has a diminish trend during the past 20 years, divides the different pattern regions of the weekday effect for the Shanghai and Shenzhen index, finds that the Chinese stock market has an "over-reaction" behavior to the weekday effect, finds that the MRS model divides the stock market into high, medium and low volatility states, and so on.Second, taking the market makers studying model as a template, this paper builds up a "day-of-the-week effect" study model based on the Bayes studying process, and then combined with the "over-reaction theory" and "herd effect" theory, proposes a complete theoretical explanation to the formation of the time-varying of the weekday effect, which provides the "time-varying hypothesis" a more solid theoretical foundation.Third, this is the first time at home and abroad, using the Markov regimes-switching model to study the "day-of-the-week effect". This paper analyzes the advantages, difficulties and solutions of this method; and under the basic ideas of the MRS model and empirical results, this paper proposes an alternative theoretical explanation to the formation of the time-varying of the weekday effect.Fourth, after the comprehensive study of the three possible forms of time-varying of the "day-of-the-week effect", based on the different theoretical explanation to the formation of the time-varying of the weekday effect, each chapter of this paper proposes some useful investment advices to the investors, respectively.The inadequacy of this paper is that, it has not been able to compare and determine which one of the two alternative explanations is more consist with the real world and more theoretical valuable. This needs to be further studied in the future.