The Day-of-the-Week Effect and Conditional Heteroskedasticity on Taiwan Over-the-Counter Securities Exchange

We apply GARCH-m model with dummy variables in the variance equation to account for seasonal conditional heteroskedasticity on Taiwan Over-the-Counter Securities Exchange (OTCE). The stocks with complete daily return data for the period from January 4, 1996 to December 31, 1998 are selected as sample. The occurrence of significantly positive returns on Saturdays and negative returns on Tuesday are found in our empirical results. The weekday return patterns are compensated for weekday risk and the reward for risk is conditional on firm size. But the findings indicate that the seasonality of weekdays cannot be entirely attributed to the variance of returns. The highly positive correlation between Tuesday returns on OTCE in Taiwan and Monday returns on NYSE and NASDAQ in America provides some evidences to explain the Tuesday anomaly.