Day-of-the-Week Effect and Market Efficiency

in the Italian Stock Market:

An Empirical Analysis
Francesco Guidi*

This paper examines the presence of the day-of-the-week effect in the Italian stock market index (MIB)
sub-sectoral returns. The study, by using GARCH-M (1,1) models, did not find evidence of the day-of-the-week
effect in mean equations, while some evidence was present in variance equations. The study also investigates the
validity of random walk hypothesis for all the MIB sub-sectoral returns. The results indicate that almost all
sub-sectoral returns did not follow a random walk process as required by market efficiency hypothesis.

Introduction
This study investigates the existence of the day-of-the-week effect in the MIB index
disaggregated at the sectoral level. The day-of-the-week effect is a regularity in the stock
market that usually takes the form of significantly negative mean returns on the first day of
the trading week (i.e., on Monday) and abnormally high mean returns on the last day
(i.e., Friday). Many empirical studies have analyzed this issue relative to developed stock
markets. For instance, Barone (1990) investigates the impact of particular dates on the MIB
stock index between 1975 and 1989. The calendar anomalies observed are the start of the
month, the 30th and 31st of the month as well as Tuesdays and Fridays. Comparing these
results with those of the US stock markets, the author argues that while in the US the largest
falls in stock prices occur on Mondays, in Italy, they occur both on Mondays and Tuesdays
(whereas the most pronounced are on Tuesdays). Taking into account the different time
zones, Italy’s results suggest that calendar effect may be imported from the US. Berument and
Kiymaz (2001) test the presence of the day-of-the-week effect during the period 1973-1997
by using the US S&P 500 stock index.
The results indicate that the day-of-the-week effect is present in the form of highest
returns on Wednesdays, while the lowest return are on Mondays. Analyzing the
day-of-the-week effect in the UK stock prices, Steeley (2001) argues that this effect seems to
have disappeared in the 1990s. On the other side, by portioning the returns into negative
and positive, the author finds that negative returns on Mondays and Fridays are significantly
different from their mid-week counterparts. Several researchers (Keim and Stambaugh, 1984;
Smirlock and Starks, 1986; and Damodaran, 1989) explore the possible factors that contribute
to the day-of-the-week anomaly. They found that this phenomenon can be due to factors
such as settlement procedure, thin trading, measurement errors as well as a high number of
* Research Assistant, Department of Economics, Marche Polytechnic University, P.le Martelli, 8, 60122, Ancona,
Italy. E-mail: francesco.guidi@univpm.it

Day-of-the-Week Effect Reserved.

© 2010 IUP. All Rights and Market Efficiency in the Italian Stock Market: 5
An Empirical Analysis
investment decisions taken at the weekends. Also, firm’s size seems to be a major factor of the
weekend effect. For instance, Abraham and Ikenberry (1994) show that there is high stock
return differences in small- and medium-sized companies.
To date, empirical studies have essentially focused on the major stock markets of the
world, while a few studies have considered the Italian stock market. The main contribution
of this study is to add further evidence of the day-of-the-week effect on stock market prices
to the empirical literature by using the index returns disaggregated at the sectoral level.
The two distinguishing features of this study are: (1) It examines security anomalies after the
introduction of the Euro; and (2) It studies this phenomenon taking into account the returns
of each sub-sector of the MIB index.
Another issue explored in this study was whether sub-sectoral markets can be considered
efficient. Usually, Efficient Market Hypothesis (EMH) is used to explain whether stock prices
reflect all available, relevant information. Stock markets can be considered weak form efficient1
if the current prices of the securities fully reflect all the information contained in its past
prices. The main implication of weak-form efficiency is the Random Walk Hypothesis (RWH),
which indicates that successive price changes are random and serially independent. If a stock
price can satisfy the RWH, then future stock prices cannot be predicted by studying their
past prices. This has important implications for both investors and fund managers, whose
trading strategies have to be designed taking into account if the prices are characterized by
random walks.
Lo and MacKinlay (1988), using a Variance Ratio (VR) test, find that in the New York
Stock Exchange (NYSE), market returns, on a weekly basis, did not follow a random walk
over the period 1962-1985, whereas they obtained opposite results by using a base observation
period of four weeks. Focusing on European equity markets, Worthington and Higgs (2004)
find that the presence of random walks in the daily returns is rejected for all markets, except
Germany, Ireland, the Netherlands, Portugal and the UK, while the more stringent Multiple
Variance Ratio (MVR) procedure rejects the presence of random walks in most European
equity markets. Worthington and Higgs (2005) examine weak-form market efficiency of a
number of emerging and developed equity markets using several alternative and
complementary methodologies. Serial correlation and runs tests evidence that none of those
markets is weak form efficient, while the VR test evidences that only developed markets are
efficient. Borges (2008) compares the behavior of stock market indices of France, Germany,
Greece, Portugal and Spain during the period 1993-2007. By using the daily and monthly
returns and conventional methodologies (correlation, runs, and MVR tests), the author
finds that only monthly returns follow a random walk in all the equity markets considered.
In recent studies, mixed evidence on the RWH was found for Central and Eastern Europe
equity markets. For instance, Nivet (1997) examines the performance of the Polish stock
1
In the broadest term of EMH, Fama (1991) categorized market efficiency into three types: weak, semi-strong and
strong form of market efficiency. In weak form efficiency, the information set is that the market index reflects
only the history of prices or returns themselves. Secondly, in semi-strong form efficiency, the information set
includes most information known to all the market participants. In strong form efficiency, the information set
includes all information known to any market participant.

6 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

market for the period 1991-1994 by using both daily and weekly returns. The author finds
that RWH does not hold for that stock market. Chun (2000) finds evidence that both the
Czech and Polish stock prices do not follow a random walk during the sample period considered
(i.e., 1992-1997). Gilmore and McManus (2003), focusing on several Central European equity
markets (the Czech Republic, Hungary and Poland) and using different methodologies, find
evidence that these markets are weak form efficiency. Buguk and Brorsen (2003) test the
RWH for the Turkey stock market using its composite, industrial, and financial weekly closing
prices. Using the Augmented Dickey-Fuller (ADF) unit root tests, Univariate Variance Ratio
(UVR) tests, and fractional integration test, empirical results evidence that all the three
series follow a random walk.
Our review raises some questions about market return dynamics. Firstly, what
return-generating process drives the equity prices at the sectoral level? The above review
does not seem to have investigated in that direction, with the exception of Buguk and Brorsen
(2003). Secondly, are industrialized stock markets efficient at the sectoral level? In order to
obtain answers to these questions, the most common tools used by the empirical literature
are used in this study with the intention to analyze the stochastic properties of the MIB
equity returns disaggregated at the sectoral level. Thus, this study provides both an important
comparison and needed additional information on return dynamics of the MIB index, which
can be considered one of the most important stock market indices in the European Union.

Methodology
Many empirical studies (Agrawal and Tandon, 1994; Coutts et al., 2000; Al-Loughani and
Chappell, 2001) investigate the day-of-the-week effect in mean returns through the
conventional OLS methodology, and appropriately defined the dummy variables for each day
of the trading week. However, this methodology has two drawbacks. First, the error terms
may not be white noise due to autocorrelation and heteroskedasticity problems resulting in
misleading the inferences. A solution to address this drawback is to include lagged values of
the return variable in a model with the following stochastic equation:
n
R t   0   M M   T T   TH TH   F F   R
i 1
i ti  t ...(1)

where Rt represents returns on an examined index; M, T, TH and F are the dummy variables
for Monday, Tuesday, Thursday and Friday, while we exclude the Wednesday’s dummy variable
from the equation to avoid the dummy variable trap. Another drawback is that error variances
are not constant over time. To overcome this last drawback, it is possible to allow variances
of errors to be time dependent and including conditional heteroskedasticity that captures
time variation of variance in stock returns. The following GARCH (p,q) model, proposed
initially by Engle (1982), and further developed by Bollerslev (1986), is used to analyze the
behavior of the time series over time, i.e.:
q p
h t2      j t2 j    j ht2 j
j 1 j 1
...(2)

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 7

An Empirical Analysis
 Thus, error terms have a mean of zero and a time changing variance of h t2 . Kiymaz and
Berument (2003) suggest two different models in order to explore the day-of-the-week effect
in both return and volatility equations. The first one is a M-GARCH(1,1) specification of
the following form:
n
R t   0   M M   T T   TH TH   F F   R
i 1
i ti  h t   t ...(3)

h t2     t21   h t21 ...(4)

where  is a measure of the risk premium, as it is possible that the conditional variance, as
proxy for the risk, can affect stock market returns. If is positive, then the risk-averse agents
must be compensated to accept the higher risk. The main drawback of the above model is
that it does not consider the day-of-the-week effect in the volatility equation. In order to
overcome that drawback, a second model, where each day trading week dummy variables are
included in the GARCH specification, can be considered. As followed by Karolyi (1995) and
Kiymaz and Berument (2003), we try to model the conditional volatility equations of equity
returns by including the day-of-the-week effect in the variance equation. Given the fact that
assets with more risk may provide higher average returns, supposing that variance is an
appropriate measure of risk, then the conditional variance can be included in the conditional
mean equation. A model which takes into account this consideration is the GARCH-in-
Mean (or GARCH-M) model developed by Engle et al. (1987). As we are conducting an
analysis at the sectoral level, we may believe that the risk of the assets in different MIB index
sectors may be different. So it seems reasonable to use in this study a GARCH-M specification
of the following form:
n
R t   0   M M   T T   TH TH   F F   R
i 1
i t i   ht   t ...(5)

h t2     M M   T T   TH TH   F F   t21   h t21 ...(6)

where Equation (5) represents the conditional mean equation, while Equation (6) represents
the conditional variance equation.
Finally, the parameters of the above specifications for the return and volatility equations
are estimated following the Quasi-Maximum Likelihood (QML) estimation of Bollerslev
and Wooldridge (1992).
In this study, several empirical tests were conducted to test for the efficiency of stock markets.
To test for the independence of successive price changes, we employed autocorrelation, unit
root and runs tests. Other tests conducted are the UVR (Lo and MacKinlay, 2003) as well as the
MVR test (Chow and Denning, 1993), and the ranks and sign test (Wright, 2000). We employed
all these tests because they are the conventional tools used in the empirical literature dealing
with stock market efficiency. A short description of these tests is given below.

8 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Autocorrelation Function (ACF) test is a statistical tool that can be used to detect the
dependence of successive terms in a given time. This test is often used in order to measure the
relationship between the stock return at current period and its value in the previous period.
The specification of the autocorrelation test is as follows:

(r  r )(rt t k  r)
k  t 1 k
m
...(7)
( r  r )
t 1
t
2

where k is the serial correlation coefficient of returns of lag k; m is the number of observations;
rt is the stock return at time t; while rt–k is the stock return over period t–k; r is the sample
mean of stock returns; and k is the lag of the period. If the stock index returns show a random
walk, this means that returns are uncorrelated. To test the joint hypothesis that all serial
coefficients k are simultaneously equal to zero, we also applied the Ljung-Box Q-statistics
and their p-values. This statistic at lag k is a test statistic for the null hypothesis that there is
no autocorrelation up to order k and is computed as follows:
k
 j2
Q LB  m( m  2) 
i 1 m  j
...(8)

where j is the jth autocorrelation and m is the number of observations. We use this test in
order to find whether the serial correlation coefficients are significantly different from zero.
As pointed out by Gan et al. (2005), it is possible to check the weak form of market
efficiency through the use of unit root tests in order to see whether stock indices are integrated
of order 1; if this hypothesis is rejected, then we can say that these stock markets follow weak
form efficiency. Two unit root tests are used to determine the stationarity of each stock index.
The first one is the ADF test developed by Dickey and Fuller (1979 and 1981), while the
other is the Phillips-Perron (PP) test (Phillips and Perron, 1988). The former is used to test
the null hypothesis for the presence of unit roots in the series of stock prices through the
following equation:
q
St   0  1St 1   i 1
i t i  uit ...(9)

where St is the stock price at time t; 0 is a constant; q is the number of lagged terms; and uit is
a white noise term. If the null hypothesis is rejected, then changes in the stock index over the
period considered are random, implying that market index follows a random walk and its
movement cannot be predicted from information pertaining to any previous period. This
means that the market is weak form efficient. In order to guarantee that errors (uit) are serially
q

uncorrelated, the autoregressive term  i 1

i ti is introduced.

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 9

An Empirical Analysis
 An alternative way of checking the stationarity of stock indices is the PP test.
The PP test overcomes the issue of serial correlations among error terms by introducing
a non-parametric method. The specification of the PP test is as follows:

St     S t 1  u t ...(10)

The runs test explores whether successive price changes are independent. A runs is a sequence
of successive price changes with the same sign. As pointed out by Füss (2005), if the returns
series exhibit larger tendency of change in one direction, the average run will be longer and the
number of runs fewer than that generated by a random process. In order to give equal weight to
each change and to consider only the direction of consecutive changes, each change in return
can be classified as positive (+), negative (–), or no change (0) (Abraham
et al., 2002). The runs test can also be used in order to calculate the direction of change from any
base; for instance, a positive change could be one in which the return is greater than the sample
mean, a negative change is one in which the return is less than the mean, and zero change
representing no change. The actual runs (R) are then counted and compared to the expected
number of runs (m) under the assumption of independence as given in Equation (11):

 3
2
 N N  1 

 n  i
i 1 ...(11)
m
N
where N is the total number of observations (price changes or returns), and ni is the number
of price changes (returns) in each category. For a large number of observations (N > 30), the
sampling distribution of m is approximately normal and the standard error (m) is given by:

m  
3
n2
i 1 i
 3
i 1 
n i2  N N  1  2N

3
i 1
n i31  N 3
...(12)
N 2 N  1
The standard normal Z-statistic, i.e., Z=(R  0.5 – m)/m, can be used to test whether the
actual number of runs is consistent with the hypothesis of independence. As pointed out
earlier, R is the actual number of runs, m is the expected number of runs, and 0.5 is the
continuity adjustment in which the sign of the continuity adjustment is negative if R  m,
and positive otherwise. When the actual number of runs exceed (fall below) the expected
runs, a positive (negative) Z-value is obtained. Positive (negative) Z-value indicates negative
(positive) serial correlation in the returns.
We further investigated the independence hypothesis by using the VR test
(Lo and MacKinlay, 1988). If the index price pt follows a random walk, then the ratio of the qth
difference scaled by q to the variance of the first difference tends to equal one, i.e.:

 2 q 
VRq   ...(13)
 2 1

10 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

where  2(q ) is the unbiased estimator of 1/q of the variance of the qth difference and  2(1)
is the variance of the first difference. Under the null hypothesis, VR(q) should be equal to 1.
In order to test the null hypothesis, Lo and Mackinlay developed test statistics for both the
cases of homoscedasticity and heteroscedasticity. Under the null hypothesis of
homoskedasticity, the first test statistic Z(q) is expressed as:

VRq   1
Zq   ~ N 0, 1 ...(14)
vq 

where v(q)=[2(2q – 1)(q – 1)]/3q(nq). Under the null hypothesis of heteroscedasticity, the
second test statistic Z*(q) is expressed as:

VRq   1
Z  q   ~ N 0,1 ...(15)
v  q 


nq
q 1
 2( q  k) 
2
( x t  x t 1  ˆ)2( x t  k  x t  k 1  ˆ)2
where v * ( q )    q  ( k) and ( k) 
t  k 1

k 1  
 nq
( x  x t 1  ˆ)2
t 1 t  2

both the Z(q) and Z*(q) statistics test the null hypothesis that VR(q) approaches 1. When
the random walk hypothesis is rejected and VR(q) > 1, returns are positively serially correlated.
When the RWH is rejected and VR(q )<1, returns are negatively serially correlated.
Chow and Denning (1993) propose an MVR test, which is based on Lo and Mackinlay
(1988) single VR test. Lo and MacKinlay (1988) procedure is implemented in order to test
the individual VRs for a specific aggregation interval (i.e., q ), but the RWH requires that
VR(q)=1 for all aggregation intervals. In the Chow and Denning’s MVR, a set of VR is tested
against 1. Consider a number of m variance ratio estimator V(qi) with i=1,...,m under the
random walk null hypothesis VR we have that V(q i )= 0 against the alternative that
V(q i)  0. The rejection of any one or more null hypotheses rejects the random walk null
hypothesis. For a set of test statistics Z(q i ), the RWH should be rejected if any one of the
estimated VR is significantly different from one. The MVR is based on the following results:

  
PR max Z( q i ) ,..., Z( q m )  SMM  ; m; T   1    ...(16)

where SMM(; m;T)1– is the upper  point of the Standardized Maximum Modulus
(SMM) distribution with parameters m (number of VR) and T (sample size) degrees of freedom.
Chow and Denning (1993) control the size of the MVR test by comparing the calculated
values of the standardized test statistics, either Z(q) or Z*(q) with the SMM critical values.
If the maximum absolute value, of say Z(q), is greater than the SMM critical value, then the
RWH is rejected. Following Chow and Denning (1993), we use the SMM distribution, which
has a critical value of 2.491 for the 5% level of significance, to test the RWH.
Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 11
An Empirical Analysis
Data
Our data consists of daily closing price indices for the time period covering January 4, 1999
through March 5, 2009. All time series were extracted from Thomson Financial Datastream.2
In this study, returns of each stock index were computed using the log price differences, i.e.,
rt  ln Pt   ln Pt 1  . Table 1 shows the descriptive statistics of MIB index returns at
the sub-sectoral level. We find that mean returns of each sub-sectoral MIB index were negative
for the period considered, with the exception of plant and machinery which reported positive
mean returns. We also see that the distribution of all series are skewed and there is evidence

Table 1: Descriptive Statistics of MIB Sub-Sectoral Index Returns

No. of Std. J-B p-
Mean Min. Max. Skewness Kurtosis
Obs. Dev. Test Value
Finance
Banks 2,653 –0.0004 –0.104 0.081 0.013 –0.531 9.450 4,724.78 0.00
Fin. Holdings 2,653 –0.0002 –0.089 0.081 0.013 –0.638 7.756 2,681.49 0.00
Fin. Services 2,653 –0.0001 –0.120 0.165 0.017 0.291 9.636 4,906.67 0.00
Insurance 2,653 –0.0003 –0.086 0.065 0.013 –0.497 7.847 2,706.60 0.00
Industrial
Cars 2,653 –0.0005 –0.108 0.110 0.017 –0.372 6.913 1,754.73 0.00
Chemicals 2,653 –0.0004 –0.107 0.07 0.012 –0.552 10.086 5,685.52 0.00
Construction 2,653 –4.9E–05 –0.074 0.084 0.012 –0.393 6.954 1,797.55 0.00
Electronics 2,653 –0.0002 –0.084 0.094 0.015 –0.135 6.375 1,267.84 0.00
Food 2,653 –0.0003 –0.271 0.087 0.014 –4.362 73.838 56,312 0.00
Industrial 2,653 –0.0003 –0.107 0.154 0.016 0.2 11.601 8,197.01 0.00
Misc.
Paper 2,653 –0.0008 –0.103 0.394 0.019 3.287 71.559 52,436 0.00
Plant and 2,653 0.0002 –0.088 0.102 0.016 –0.308 7.919 2,717.29 0.00
Machinery
Textile and 2,653 –0.0001 –0.087 0.106 0.013 –0.124 7.886 2,646.40 0.00
Clothing
Services
Distribution 2,653 –0.0004 –0.095 0.195 0.015 0.763 18.811 27,892.25 0.00
Media 2,653 –0.0004 –0.104 0.227 0.017 0.816 17.653 24.031 0.00
Pub_Util_Serv 2,653 –0.0002 –0.106 0.090 0.012 –0.202 9.159 4,211.8 0.00
Transport 2,653 –3.1E–05 –0.065 0.104 0.011 –0.088 10.606 6,399.44 0.00
and Tourism

2
See Appendix.

12 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

of excess kurtosis, so the distributions are leptokurtic. Non-normal distributions of returns
are confirmed by Jarque-Bera test: as shown by the p-values, the null hypothesis of a normal
distribution is rejected for all series.

Empirical Results
Table 2 reports the estimates of the day-of-the-week effect and stock market volatilities
obtained through the GARCH-M model (Equations (5) and (6)). Panel A displays the
estimates for conditional mean equations, while Panel B shows the conditional variance
equation estimates. Considering Panel A, we can see that the estimated coefficients of
Thursday’s dummy variable for the finance holdings (0.0008) and finance services (0.0014)
indices are positive and statistically significant at 5% and 10% levels respectively, suggesting
that Thursday returns are greater than those of Wednesday. Anyway, we do not find the
evidence of the day-of-the-week effect, given that coefficient estimates for both Mondays
and Fridays are not statistically significant. Further, we find that the conditional standard
deviation of the return equation (risk) is negative for the finance holdings index alone.
In Panel B, we report the estimate of the conditional variance equation. The estimated coefficient
of the constant term for the conditional variance equation is , while  and  are the estimated
coefficient of the lagged value of the squared residual term and the lagged value of the conditional
variance respectively. Each of these coefficients is statistically significant and positive for each
index under consideration. Also the sum of the  and  coefficients is less than 1. Thus, our
results suggest that conditional variances are always positive and not explosive in our sample.
Panel B of Table 2 reports the Ljung-Box Q-statistics3 for the normalized residuals and Engle’s
(1982) ARCH-LM test4 at 4-, 8- and 12-day lags. The results of the Q-statistics show that we
cannot reject the null hypothesis that there is no autocorrelation among the residuals. In other
words, given the fact that there is no serial correlation in the mean equation, we may conclude
that the mean equation is correctly specified. Further, ARCH-LM test results show no evidence
of the remaining ARCH effects. This means that the variance equations of each sub-index
GARCH-M model were correctly specified.
The conditional variance of the return is allowed to change for each day of the week by
modeling the conditional variance of return equation as a modified GARCH. This is done to
detect the presence of the day-of-the-week effect in volatility. The highest volatility occurs
on Mondays for the banks (2.27E–05) index returns, while the lowest is achieved on Thursdays
for the finance services index (–4.14E–05).
3
The Q-statistics at lag k is a test statistic for the null hypothesis that there is no autocorrelation up to order k.
4
This is a Lagrange Multiplier (LM) test for the autoregressive conditional heteroskedasticity in the residuals.
It tests the null hypothesis that there is no ARCH up to order q in the residuals. In this study, EViews software
was used. This software reports two test statistics from this test regression. The F-statistics is an omitted
variable test for the joint significance of all the lagged squared residuals, while the Obs*R2 statistics is Engle’s
LM test statistic, computed as the number of observations times the R2 from the test regression. In order to
save space, we reported only the last one, whereas the results of the former test are available upon request
from the author.

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 13

An Empirical Analysis
 To summarize, we do not find evidence of the day-of-the-week in the mean equations,
while we find some evidence on variance volatility equations for all the sub-sectoral indices,
with the exception of the mean equation of the banks index.

Table 2: The Day-of-the-Week Effect

in GARCH-M(1,1) Model Finance Sub-Sectoral Returns
Panel A
Mean Equations
Index Banks Finance Holdings Finance Services Insurance
 0.0005 0.0005 0.0008 0.0003
(0.0004) (0.0004) (0.0007) (0.0004)
 –0.0008 0.0006 –0.0006 –0.0006
(0.0004) (0.0005) (0.0008) (0.0005)
 –0.0004 0.00014 –0.0011 –0.0001
(0.0005) (0.0005) (0.0007) (0.0004)
 0.0005 0.0008* 0.0014** 3.53E–05
(0.0005) (0.0005) (0.0007) (0.0004)
F –0.0002 0.0009 –0.0003 –0.0001
(–0.404) (0.0005) (0.0008) (0.0004)
Returnt–1 –0.262** 0.177** 0.200** 0.195***
(2.156) (0.021) (0.020) (0.02)
 –0.262 –3.945* –1.353 1.377
(2.156) (2.354) (1.764) (2.355)
Variance Equations
 1.62E–06 5.08E–06 4.42E–05*** 5.07E–06
(4.57E–06) (5.27E–06) (7.30E–06) (4.53E–06)
 0.089** 0.159*** 0.164*** 0.115***
(0.006) (0.013) (0.011) (0.008)
 0.903** 0.820*** 0.829*** 0.872***
(0.006) (0.012) (0.010) (0.008)
M 2.27E–05** 2.18E–05*** –2.59E–05** 1.68E–05**
(6.63E–06) (6.39E–06) (1.06E–05) (6.74E–06)
T –1.31E–05 –2.04E–05** –4.02E–05*** –2.38E–05
(8.36E–06) (8.74E–06) (–3.442) (7.47E–06)
TH –5.14E–06 –1.00E–06 –4.14E–05*** 1.64E–06
(7.54E–06) (9.37E–06) (1.35E–05) (8.03E–06)
F –5.51E–06 –2.85E–06 –7.69E–05 –8.58E–06
(5.99E–06) (–7.12E–06) (1.06E–05) (5.95E–06)

14 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 2 (Cont.)
Panel B: Autocorrelation Q-Statistic and ARCH-LM Tests for Various Lags
Q(4) ARCH(4) Q(8) ARCH(8) Q(12) ARCH(12)
Banks 3.755 1.738 5.225 1.448 7.483 1.133
(0.289) (0.138) (0.632) (0.171) (0.759) (0.327)
Finance 14.782 2.099 16.544 1.299 20.119 0.999
Holdings (0.002) (0.078) (0.021) (0.238) (0.044) (0.446)
Finance 0.749 0.372 5.243 0.569 7.256 0.644
Services (0.862) (0.828) (0.630) (0.803) (0.778) (0.805)
Insurance 2.351 3.233 7.907 1.507 15.394 1.044
(0.503) (0.011) (0.341) (0.149) (0.165) (0.404)
Note: *,** and *** Indicate that we reject the null hypothesis with the following critical levels: 10%, 5% and 1%;
In Panel A, standard errors are reported in parentheses; and in Panel B, p-values are reported in parentheses.

Panel A of Table 3 displays the estimates for the return equation relative to the industrial
sub-sectoral returns. The estimated coefficients of Thursday’s dummy variables are positive
and statistically significant for the food, industrial miscellaneous, paper, plant and machinery
and textile and clothing returns. We also note that the estimated coefficients of the Mondays
and Fridays dummy variable relative to the paper industry returns are also positive and
significant. Moving to the conditional variance equation, we may note that the estimated
coefficients of the lagged value of the squared residual term and the lagged value of the
conditional variance are positive and significant, while their sum is less than 1 for all indices.
Furthermore, the highest volatility occurs on Mondays for the industrial miscellaneous returns,
while the lowest occurs on Tuesdays for the food industry returns. Panel B of Table 3 reports
the autocorrelation Q-statistics and ARCH-LM tests for several lags. Most of the
Q-tests indicate that there is no autocorrelation for all indexes under consideration, except
for electronics (at all lags) and paper (up to 4 lags).
Panel A of Table 4 displays the estimates for return equations relative to the services sub-
indices returns. The estimated coefficients of Thursday’s dummy variables for the distribution
(0.0009) and transport and tourism (0.0001) returns are positive and statistically significant
at 10% and 5% levels respectively, suggesting that returns on Thursdays are greater than
those of Wednesdays. We also find that Friday’s return dummy variables for the distribution
(0.0019) and services-others (0.0016) are positive and significant. We may note that the
estimated coefficients of the dummy variables for the media and public utilities services
returns are all insignificant. Hence, the day-of-the-week effect is present just for the
services-others sub-index returns. Moving to the estimates of the conditional variance
equations, we may note that the constant coefficient  is positive and statistically significant
for public utilities-services, services-others, and transport and tourism returns. Also, the
coefficients  and  are positive and significant, while their sum is also less than 1. Further, we
find that the highest volatility occurs on Fridays for the media sub-sector index returns,
while the lowest volatility occurs on Tuesdays for the services-others returns.

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 15

An Empirical Analysis
16
Table 3: The Day-of-the-Week Effect in GARCH-M(1, 1) Model, Industrial Sub-Sectoral Returns
Panel A
Mean Equation

Index Cars Chemicals Construction Electronic Food Industrial Paper Plant and Textile
Misc. Machinery and Clothing
0 –5.83E–06 0.0002 0.0003 0.0003 –0.0005 –0.0003 –0.002*** 0.0001 0.0004
(0.0006) (0.0004) (0.0004) (0.0004) (0.0005) (0.0005) (0.0007) (0.0006) (0.0005)
M 0.0003 –0.0001 0.0001 –0.0003 0.0007 0.0007 0.001** 0.001 0.0003
(0.0007) (0.0005) (0.0005) (0.0006) (0.0007) (0.0007) (0.0008) (0.0007) (0.0006)
T 0.0005 –0.0003 –4.27E–05 –0.0005 0.0005 –0.0002 0.0008 –0.0006 –0.0004
(0.0007) (0.0004) (0.0004) (0.0006) (0.0005) (0.0006) (0.0008) (0.0006) (0.0005)
TH 0.0011 7.38E–06 0.0002 0.0012 0.0015** 0.0011* 0.004*** 0.0009 0.001**
(0.0006) (0.0004) (0.0004) (0.0006) (0.0005) (0.0006) (0.0008) (0.0006) (0.0005)
F –0.0004 –0.0008 1.43E–05 0.00013 0.0011* 0.001 0.003*** 0.00058 0.0003
(0.0007) (0.0005) (0.0004) (0.0006) (0.0006) (0.0006) (0.0008) (0.0006) (0.0006)
Returnt–1 0.232*** 0.182*** 0.238*** 0.159 0.179 0.119** 0.139*** 0.174*** 0.169***
(0.019) (0.0201) (0.021) (0.00) (0.021) (0.021) (0.028) (0.0211) (0.020)
 –0.954 –0.285 –0.032 –1.242 1.586 –0.180 –0.617 1.701 –1.246
(2.064) (2.832) (2.840) (1.797) (2.458) (1.789) (1.737) (2.20) (2.349)
Variance Equations
 –1.64E–06 5.63E–06 –3.42E–08 –1.01E–06 2.24E–05*** –1.91E–05*** 6.90E–05*** 1.69E–05 1.28E–05**
(9.2E–06) (5.04E–06) (4.74E–06) (5.71E–06) (6.82E–06) (5.88E–06) (1.08E–05) (9.57E–06) (5.88E–06)
 0.106*** 0.108*** 0.140*** 0.072** 0.089*** 0.149*** 0.441*** 0.146*** 0.1***
(0.008) (0.007) (0.012) (0.007) (0.008) (0.008) (0.020) (0.014) (0.007)
 0.877*** 0.880*** 0.837*** 0.923** 0.890*** 0.843*** 0.415*** 0.813*** 0.882***
(0.008) (0.007) (0.012) (0.006) (0.0106) (0.007) (0.022) (0.017) (0.007)
M 2.09E–05 1.62E–05** 2.47E–05*** 2.86E–05*** 2.27E–05*** 6.21E–05*** 9.62E–06 1.97E–05* –8.81E–06
(1.35E–05) (7.59E–06) (6.91E–06) (7.68E–06) (1.01E–05) (8.20E–06) (1.30E–05) (1.16E–05) (7.84E–06)

The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 3 (Cont.)
Index Cars Chemicals Construction Electronic Food Industrial Paper Plant and Textile
Misc. Machinery and Clothing
–8.03E–06 –2.07E–05** –3.59E–06 1.15E–06 –6.90E–05*** 1.35E–05 3.58E–05** –4.71E–06 –1.84E–05**
T (1.73E–05) (9.06E–06) (8.35E–06) (9.81E–06) (1.18E–05) (1.08E–05) (1.58E–05) (1.52E–05) (9.37E–06)
8.59E–06 –1.02E–05 4.55E–06 1.84E–05* –1.70E–05 1.59E–05* 4.42E–05** –1.17E–06 –4.57E–06

An Empirical Analysis
 TH (1.61E–05) (8.64E–06) (8.06E–06) (1.06E–05) (1.22E–05) (9.57E–06) (1.94E–05) (1.70E–05) (1.04E–05)
1.22E–05 –2.01E–06 –8.27E–06 –3.60E–05*** –2.99E–05*** 3.05E–05 –1.87E–05 –4.97E–05*** –1.70E–05**
F (1.35E–05) (7.01E–06) (6.08E–06) (7.97E–06) (1.00E–05) (8.41E–06)*** (1.35E–05) (1.28E–05) (8.02E–06)
Panel B: Autocorrelation Q-Statistic and ARCH-LM Tests for Various Lags
Q(4) ARCH(4) Q(8) ARCH(8) Q(12) ARCH(12)
Cars 6.169 2.318 7.990 1.441 10.500 1.184
(0.104) (0.054) (0.333) (0.174) (0.486) (0.287)
Chemicals 4.157 0.292 5.568 0.631 7.024 1.031
(0.245) (0.882) (0.591) (0.752) (0.797) (0.416)
Construction 4.342 0.440 9.398 0.288 14.037 0.547
(0.227) (0.779) (0.225) (0.969) (0.231) (0.884)
Electronic 11.696 0.654 23.284 0.499 27.768 0.532
(0.008) (0.623) (0.002) (0.857) (0.004) (0.895)
Food 8.618 0.630 9.238 0.536 9.876 0.631

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market:

(0.035) (0.640) (0.236) (0.830) (0.542) (0.817)
Industrial Misc. 4.693 0.593 5.849 0.692 12.603 0.683
(0.196) (0.667) (0.558) (0.698) (0.320) (0.769)
Paper 10.443 0.205 12.733 0.138 14.494 0.145
(0.015) (0.935) (0.079) (0.997) (0.207) (0.998)
Plant and Machinery 5.227 0.599 8.706 0.646 13.492 0.596
(0.156) (0.663) (0.274) (0.739) (0.262) (0.846)
Textile and Clothing 4.839 1.127 14.181 0.892 14.935 1.014
(0.180) (0.341) (0.048) (0.521) (0.186) (.431)
Note: *,** and *** Indicate that we reject the null hypothesis with the following critical levels: 10%, 5% and 1%; In Panel A, standard errors are in parentheses, and
in Panel B, p-values are in parentheses.

17
18
Table 4: The Day-of-the-Week Effect in GARCH-M(1, 1) Model, Services Sub-Sectoral Returns

Panel A
Mean Equations
Index Distribution Media Pub_Util_Serv Serv_Others Trans_Tourism
0 –0.0008* –0.0001 0.0002 7.16E–05 0.0001
(0.0004) (0.0004) (0.0003) (0.0006) (0.0003)
M 0.0009 –0.0001 –0.0008 –0.0004 –0.0001
(0.0006) (0.0006) (0.0005) (0.0008) (0.0004)
T 0.0005 –0.0003 –0.00058 –0.0007 –0.0001
(0.0005) (0.0005) (0.0004) (0.0006) (0.0004)
TH 0.0009* 0.0004 0.0001 –0.0001 0.0001**
(0.0005) (0.0005) (0.0004) (0.0007) (0.000)
F 0.001* 9.36E–05 –0.0002 0.0016** 0.0007
(0.0006) (0.0005) (0.0004) (0.0007) (0.0004)
Returnt–1 0.182 0.187*** 0.186*** 0.103*** 0.172***
(0.022) (0.019) (0.019) (0.0274) (0.020)
 0.379 –0.209 1.965 3.794 –0.1707
(2.039) (1.414) (2.423) (2.437) (2.947)
Variance Equations
 –9.02E–06 2.12E–06 6.45E–06* 3.16E–05*** –1.30E–06***
(7.12E–06) (4.52E–06) (3.85E–06) (4.48E–06) (3.24E–06)
 0.159*** 0.092*** 0.102*** 0.220*** 0.129***
(0.012) (0.007) (0.008) (0.017) (0.009)
 0.841*** 0.908*** 0.890*** 0.675*** 0.843***
(0.011) (0.006) (0.008) (0.019) (0.010)

The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 4 (Cont.)

Index Distribution Media Pub_Util_Serv Serv_Others Trans_Tourism

M 1.34E–05 2.22E–05*** 3.35E–05*** 3.49E–05*** 3.09E–05***

(1.02E–05) (7.41E–06) (5.85E–06) (8.50E–06) (5.12E–06)

An Empirical Analysis
T 1.83E–05 –1.03E–05 3.70E–05*** –7.03(E–05)*** 2.87E–05
(1.22E–05) (8.08E–06) (6.37E–06) (1.05E–05) (5.84E–06)
TH 1.96E–05 2.63E–07 –9.94E–06 –2.28E–05** 3.77E–05***
(1.22E–05) (8.75E–06) (6.99E–06) (8.67E–06) (5.88E–06)
F 1.43E–05 6.52E–06*** –1.14E–05** 2.17E–05*** 7.32E–07
(1.00E–05) (–2.681) (5.11E–06) (7.36E–06) (4.75E–06)
Panel B: Autocorrelation Q-Statistic and ARCH-LM Tests for Various Lags
Q(4) ARCH(4) Q(8) ARCH(8) Q(12) ARCH(12)
Distribution 4.889 0.278 8.181 0.431 13.899 0.442
(0.180) (0.891) (0.317) (0.902) (0.239) (0.946)
Media 3.868 0.504 16.460 0.468 19.096 0.335
(0.276) (0.732) (0.021) (0.878) (0.059) (0.982)

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market:

Pub_Util_Serv 3.766 1.862 12.313 1.252 15.208 1.262
(0.288) (0.114) (0.091) (0.264) (0.173) (0.233)
Serv_Others 1.806 0.384 5.858 0.417 13.250 0.355
(0.614) (0.819) (0.556) (0.911) (0.277) (0.978)

Trans_Tourism 6.183 1.270 12.514 0.957 13.882 0.829

(0.103) (0.279) (0.085) (0.467) (0.240) (0.620)

Note: *,** and *** Indicate that we reject the null hypothesis with the following critical levels: 10%, 5% and 1%; In Panel A, standard errors are in parentheses, and
in Panel B, p-values are in parentheses.

19
 One of the requirements for a random walk is that the time series must contain a unit
root. Therefore, first we test for the presence of a unit root in the log level series. The two
methods applied are: the ADF and the PP tests. The results of the ADF and PP unit root tests
(Table 5) show the existence of unit roots, and therefore non-stationarity, in the levels of
variables. However, the first differences of the stock indices variables are stationary under
both the ADF and PP tests. Hence, we conclude that MIB sub-sectoral indices are integrated
of order I(1). However, the main conclusion is that these stock market indices follow the
weak form efficiency hypothesis.
We further employ the ACF test in order to examine the degree of autocorrelation in
returns series, given that this test measures the correlation between the current and lagged
Table 5: Unit Root Test on MIB Stock Markets Sub-Sectoral Indices Returns
ADF Test PP Test
Lag Lengths t-Statistic p-Value Bandwidth t-Statistic p-Value
Variables in Log Level
Finance
Banks 1 0.741 0.993 3 1.026 0.991
Finance Hold. 1 –0.137 0.943 23 –0.546 0.879
Finance Misc. 2 –1.536 0.515 7 –1.560 0.502
Finance Serv. 1 –1.500 0.533 9 –1.395 0.586
Insurance 1 0.042 0.961 13 0.262 0.976
Industrial
Cars 1 –0.809 0.816 11 –0.619 0.863
Chemicals 1 –0.258 0.928 7 –0.196 0.936
Construction 1 –1.031 0.743 13 –1.008 0.752
Electronics 4 –1.273 0.644 19 –1.266 0.647
Food 2 –1.094 0.720 22 –1.347 0.609
Industrial Misc. 1 0.869 0.995 2 1.01 0.996
Plant and Mach. 2 –1.353 0.606 13 –1.338 0.613
Textile and Cloth. 1 –0.699 0.844 9 –0.621 0.863
Services
Distribution 1 0.393 0.982 9 0.422 0.983
Media 1 0.567 0.988 21 0.368 0.981
Pub_Util_Serv 2 –0.093 0.948 12 –0.151 0.942
Trans. and Touris. 2 –0.817 0.813 17 –0.932 0.778

20 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 5 (Cont.)
ADF Test PP Test
Lag Lengths t-Statistic p-Value Bandwidth t-Statistic p-Value
Variables in First Log Difference
Finance
Banks 0 –41.860*** 0.00 1 –41.90*** 0.00
Finance Hold. 0 –42.106*** 0.00 22 –44.02*** 0.00
Finance Misc. 1 –35.920*** 0.00 0 –43.179*** 0.00
Finance Serv. 0 –44.226*** 0.00 13 –43.952*** 0.00
Insurance 0 –42.298*** 0.00 12 –41.986*** 0.00
Industrial
Cars 0 –40.794*** 0.00 15 –40.382*** 0.00
Chemicals 0 –43.492*** 0.00 4 –43.660*** 0.00
Construction 0 –40.486*** 0.00 9 –40.583*** 0.00
Electronics 3 –22.653*** 0.00 17 –43.809*** 0.00
Food 1 –34.417*** 0.00 19 –41.737*** 0.00
Industrial Misc. 0 –45.448*** 0.00 6 –45.463*** 0.00
Plant and Mach. 1 –35.092*** 0.00 8 –41.965*** 0.00
Textile and Cloth. 0 –43.550*** 0.00 7 –43.438*** 0.00
Services
Distribution 0 –43.688*** 0.00 8 –43.792*** 0.00
Media 0 –41.307*** 0.00 20 –42.06*** 0.00
Pub_Util_Serv 1 –35.809*** 0.00 11 –42.988*** 0.00
Trans. and Touris. 1 –35.615*** 0.00 15 –44.155*** 0.00
Note: Both the ADF and PP tests test the null hypothesis that the series has a unit root against the alternative
of no unit root (stationarity). The asymptotic critical values for both the ADF and PP test statistics at
10%, 5% and 1% levels are –2.567, –2.862, –3.432 respectively; *, ** and *** indicate that we reject the
null hypothesis with the following critical levels: 10%, 5% and 1%.

observations of the time series of stock returns. If there is no serial correlations among
returns, the autocorrelation at all lags should be nearly zero, and all Q-statistics should be
insignificant with large p-values. According to the results reported in Tables 6, 7 and 8, there
are movements of autocorrelation at various lags for all the sub-sectoral indices returns, and
the ACF of daily returns displays a positive autocorrelation with some exception. It is worth
noting here that the positive sign of the autocorrelation coefficients shows that consecutive
daily returns tend to have the same sign, so that a positive (negative) return in the current
day tends to be followed by an increase (decrease) of return in the next several days.
Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 21
An Empirical Analysis
Since we found significant predictability of returns for all sub-sectoral indices, we can say
that the market efficiency hypothesis is rejected for all sub-sectoral indices returns.
The implication of the Efficient Market Hypothesis (EMH) is that these indices were not
efficient during the study period since there was a strong chance that investors could use the
historical data to earn extraordinary gains by looking at the past value of returns.
We further detected serial independence in the returns through the non-parametric runs
test, which determines whether successive returns are independent of each other, as should
happen under the null hypothesis of a random walk.5 Results, presented in Table 9, show that
the actual number of runs (i.e., R) for each sub-sectoral index return can be seen to fall short
of the expected number (i.e., m) of runs under the null hypothesis of stock run independence.
Table 6: Autocorrelation Tests with p Lags for Finance Sub-Sectoral Daily Returns
Lags
Index
1 4 8 12 16
Banks
ACF 0.202 0.027 0.030 0.039 0.044
Q-Statistics 108.38 111.74 140.98 151.48 158.12
p-Value 0.00 0.00 0.00 0.00 0.00
Insurance
ACF 0.192 -0.018 0.058 0.013 0.015
Q-Statistics 98.318 102.18 126.92 136.17 138.56
p-Value 0.00 0.00 0.00 0.00 0.00
Finance Holdings
ACF 0.199 0.070 0.053 0.046 0.020
Q-Statistics 105.11 127.21 147.85 156.71 166.57
p-Value 0.00 0.00 0.00 0.00 0.00
Finance Miscellaneous
ACF 0.174 0.037 0.039 –0.025 0.027
Q-Statistics 80.826 91.481 108.8 113.08 132.33
p-Value 0.00 0.00 0.00 0.00 0.00
Finance Services
ACF 0.151 0.022 0.009 –0.011 0.025
Q-Statistics 60.370 64.711 76.068 78.082 83.770
p-Value 0.00 0.00 0.00 0.00 0.00

5
As pointed out by Abraham et al. (2002), given that the return data do not conform to the normal distribution
(as reported by the Jarque-Bera test statistic in Table 1), the runs test might be considered more appropriate than
a parametric serial correlation test.

22 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 7: Autocorrelation Tests with p Lags for Services Sub-Sectoral Daily Returns

Lags
Index
1 4 8 12 16

Distribution
ACF 0.163 0.012 0.018 0.012 0.025

Q-Statistics 70.328 72.833 76.198 88.271 95.712

p-Value 0.00 0.00 0.00 0.00 0.00

Media
ACF 0.217 0.013 0.080 0.007 0.026

Q-Statistics 125.32 126.22 152.35 154.88 167.20

p-Value 0.00 0.00 0.00 0.00 0.00

Public Utility Services

ACF 0.173 0.034 0.048 –0.008 0.044

Q-Statistics 79.215 89.086 104.96 110.01 123.54

p-Value 0.00 0.00 0.00 0.00 0.00

Transport and Tourism

ACF 0.156 0.044 0.012 0.025 0.001

Q-Statistics 64.364 74.514 86.721 90.138 92.043

p-Value 0.00 0.00 0.00 0.00 0.00

Table 8: Autocorrelation Tests with p Lags for Industrial Sub-Sectoral Daily Returns
Lags
Index
1 4 8 12 16
Cars
ACF 0.228 0.025 –0.047 0.011 0.042
Q-Statistics 138.54 146.74 159.64 176.22 186.46
p-Value 0.00 0.00 0.00 0.00 0.00
Chemicals
ACF 0.168 0.00 –0.005 0.028 0.028
Q-Statistics 74.793 87.181 91.103 98.225 113.27
p-Value 0.00 0.00 0.00 0.00 0.00

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 23

An Empirical Analysis
 Table 8 (Cont.)
Lags
Index
1 4 8 12 16
Construction
ACF 0.236 0.031 0.011 0.025 0.075
Q-Statistics 147.48 157.30 159.88 169.97 200.95
p-Value 0.00 0.00 0.00 0.00 0.00
Electronics
ACF 0.173 0.080 0.065 0.008 0.013
Q-Statistics 79.620 98.306 118.24 121.19 126.56
p-Value 0.00 0.00 0.00 0.00 0.00
Food
ACF 0.221 0.037 0.028 0.001 –0.004
Q-Statistics 130.03 134.45 164.58 165.05 165.74
p-Value 0.00 0.00 0.00 0.00 0.00
Industrial Miscellaneous
ACF 0.124 0.059 –0.043 0.001 0.030
Q-Statistics 40.807 52.136 60.632 69.246 78.083
p-Value 0.00 0.00 0.00 0.00 0.00
Plant and Machinery
ACF 0.193 0.001 0.005 –0.019 0.005
Q-Statistics 98.456 108.46 115.25 121.28 129.74
p-Value 0.00 0.00 0.00 0.00 0.00
Textile and Clothing
ACF 0.166 0.008 0.027 –0.006 0.073
Q-Statistics 73.268 75.442 81.846 88.206 108.96
p-Value 0.00 0.00 0.00 0.00 0.00

Table 9: Runs Test for the MIB Stock Market Sectoral Returns
R m (m) Z
Finance
Banks 976 1,314.23 25.5 –13.24
Finance Holdings 1,021 1,308.02 25.38 –11.28
Finance Misc. 1,015 1,312.44 25.46 –11.66

24 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 9 (Cont.)
R m (m) Z
Finance Services 1,011 1,324.93 25.70 –12.11
Insurance 1,016 1,319.47 25.602 –11.833
Industrial
Cars 1,083 1,316.95 25.55 –9.13
Chemicals 1,041 1,321.73 25.64 –10.92
Construction 1,002 1,312.85 25.47 –12.18
Electronics 1,073 1,316.95 25.55 –9.52
Food 1,082 1,314.80 25.51 –9.10
Industrial Misc. 1,078 1,323.73 25.68 –9.54
Paper 1,129 1,326.46 25.73 –7.65
Plant and Machinery 1,030 1,325.97 25.72 –11.484
Textile and Clothing 994 1,317.61 25.565 –12.638
Services
Distribution 1,012 1,325.92 25.72 –12.18
Media 981 1,325.38 25.717 –13.371
Pub_Util_Serv 1,004 1,321.23 25.636 –12.354
Trans. and Touris. 1,000 1,321.96 25.651 –12.532
Note: R is the number of runs; m is the actual number of runs; (m) is the standard error of runs; Z is the
Z-statistic.

The resulting negative Z-values for all the sub-sectoral returns indicate a positive serial
correlation. This means that successive returns for all the sub-sectoral returns are not
independent and there is evidence of autocorrelation. Therefore, the results of the run tests
indicate that MIB’s stock market sub-indices are not efficient.
Liu and Hu (1991) argue that unit root tests do not uniformly identify the departure from
a random walk. The main consequence of this is that they are not sufficient in testing the
market efficiency hypothesis. The VR test (Lo and MacKinlay, 1988) can be used as an
alternative to examine the predictability of equity returns. The results of the VR tests are
presented in Table 10. Given the observation intervals of 2, 4, 8 and 16 days with a base of 1
day, VR estimates are computed for 2, 4, 8, 16-day observation intervals. Relative to the daily
returns of MIB finance sector, Table 10 shows that the RWH is rejected for all the
sub-sectoral indices returns. For example, if we consider the results of banks’ sub-index, the
null hypothesis that daily equity returns follow a homoskedastic random walk is rejected at
Z(1)=10.182. Rejection of the null hypothesis of a random walk under homoskedasticity for
a 2-day period also imply that the random walk is rejected under the alternative sampling

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 25

An Empirical Analysis
periods, and we may, therefore, conclude that the bank equity returns do not follow a random
walk. However, the rejection of the null hypothesis under homoskedasticity could result
from heteroskedasticity in the return series. After a heteroskedastic-consistent statistic is
calculated, the null hypothesis is also rejected at Z(2) = 5.1760. Therefore, we may conclude
that the bank equity market is not efficient in the weak form, along with the other markets
of the finance sector. Moving to the MIB daily returns of both industrial and services
sub-sector returns, we can see that the RWH is also rejected for all series.

Table 10: Univariate Variance Ratios for MIB Sub-Sectoral Daily Returns
Number q of Base Observations (Lags) Aggregated to Form Variance Ratio
2 4 8 16
Finance
Banks 1.1976 1.285 1.283 1.283
(10.182)** (7.888)** (4.931)** (3.321)**
[5.1760]** [3.971]** [2.507]** [1.742]
Finance Hold. 1.198 1.360 1.589 1.839
(10.234)** (9.927)** (10.258)** (9.821)**
[5.868]** [5.744]** [6.035]** [6.015]**
Finance Misc. 1.174 1.222 1.282 1.345
(9.0022)** (6.115)** (4.921) (4.043)**
[4.692]** [3.352]** [2.875] [2.538]**
Finance Serv. 1.151 1.240 1.261 1.203
(7.80)** (6.607)** (4.554)** (2.380)**
[4.708]** [4.2003]** [3.128]** [1.174]
Insurance 1.187 1.279 1.257 1.237
(9.678)** (7.702)** (4.477)** (2.774)**
[5.493]** [4.430]** [2.613]** [1.689]
Industrial
Cars 1.228 1.391 1.485 1.381
(11.790)** (10.766)** (8.456)** (4.461)**
[7.408]** [6.969]** [5.599]** [3.046]
Chemicals 1.166 1.325 1.404 1.407
(8.562)** (8.968)** (7.046)** (4.773)**
[5.0842]** [5.467]** [4.441]** [3.168]**
Construction 1.236 1.413 1.536 1.564
(12.108)** (11.388) (9.349) (6.608)
[6.998]** [6.683] [5.568] [4.086]

26 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

 Table 10 (Cont.)
Number q of Base Observations (Lags) Aggregated to Form Variance Ratio
2 4 8 16
Electronics 1.172 1.258 1.402 1.547
(8.882) (7.111) (7.005) (6.410)
[5.967] [4.939] [4.895] [4.487]
Food 1.221 1.317 1.480 1.682
(11.427)** (8.734)** (8.367)** (7.984)**
[3.653] [3.320]** [3.516] [3.183]
Industrial Misc. 1.122 1.170 1.253 1.278
(6.288)** (4.695)** (4.419)** (3.258)**
[3.571]** [2.693]** [2.566]** [1.969]**
Paper 1.1570 1.273 1.357 1.340
(8.087)** (7.530)** (1.357)** (3.982)
[5.397]** [5.350]** [4.718]** [3.242]
Plant and 1.193 1.232 1.264 1.275
Machinery (9.988)** (6.395)** (4.603)** (3.224)**
[4.861]** [3.186]** [2.360]** [1.731]
Textile and 1.166 1.246 1.298 1.285
Clothing (8.563)** (6.772) (5.190) (3.337)
[4.969]** [3.988] [3.159] [2.122]
Services
Distribution 1.163 1.278 1.367 1.394
(8.418)** (7.665)** (6.401)** (4.617)**
[5.213]** [4.831]** [4.189]** [3.203]
Media 1.217 1.3202 1.418 1.636
(11.185)** (8.816)** (7.279)** (7.448)**
[6.211]** [5.158]** [4.382]** [4.597]**
Pub_Util_Serv 1.172 1.203 1.231 1.239
(8.9006)** (5.603)** (4.034)** (2.803)**
[4.283]** [2.745]** [2.109]** [1.609]
Trans. and Touris. 1.154 1.184 1.277 1.277
(7.935)** (5.075)** (4.827)** (4.827)**
[4.403]** [2.831]** [2.764]** [2.764]**
Note: The variance ratios are reported in the main rows, with the homoskedasticity Z(q) and heteroskedasticity
robust test statistics Z*(q) given in (.) and [.] respectively. Under the random walk null hypothesis, the
value of the variance ratio test is 1 and the test statistics have a standard normal distribution (asymptotically).
Test statistics marked with ** indicate that the corresponding variance ratios are statistically different
from 1 at the 5% level of significance.

Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 27

An Empirical Analysis
 The exogenous choice of block length (q) in the UVR test represents the main limit of
that approach. The RWH requires that the VRs for all aggregation intervals should be equal
to 1. In order to overcome this drawback, we implement the Chow and Denning (1993)
multiple VR test, in which the decision is made according to the maximum absolute value of
the individual VR statistics, i.e., Z1(q). If we consider the finance sub-sector returns
(Table 11), we see that both the Z1(q) and Z2(q) are significant. In other words, we do reject the
RWH. We obtain the same result for both industrial and services sub-sectoral returns.
Table 11: Multiple Variance Ratio Test on Log
Index Z1(q) Z2(q)
Finance
Banks 48.641 29.276
Insurance 51.158 31.162
Finance Holdings 51.407 34.522
Finance Miscellaneous 51.471 35.756
Finance Services 51.389 31.456
Industrial
Cars 51.445 42.291
Chemicals 51.355 30.317
Construction 51.496 32.182
Electronics 51.428 32.217
Food 51.397 33.943
Industrials Miscellaneous 51.347 32.111
Paper 51.359 26.569
Plants and Machinery 51.526 34.843
Textile and Clothing 51.376 34.198
Services
Distribution 51.251 21.402
Media 51.395 24.313
Pub_Util_Serv 51.281 26.567
Trans. and Touris. 51.458 42.137
Note: Z1(q) test statistic for the null hypothesis of homoskedastic increments random walk; Z2(q) test statistic
for the null hypothesis of heteroskedastic increments random walk. The critical value for Z1(q) and Z2(q)
at the 5% level of significance is 2.49.

Conclusion
The present study examines the day-of-the-week anomaly as well as the market efficiency
hypothesis in MIB stock market index disaggregated at the sub-sectoral level for the period
1999-2009. By using GARCH-M models, relative to the finance sub-sectoral returns, the
study finds abnormal returns on Thursdays for the finance holdings and finance services

28 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

returns, while it finds the same effect on the variance equation relatively to Mondays for all
finance sub-sectoral returns. Tuesday effect is also evident for finance holdings and finance
services returns. Regarding the manufacturing sub-sectoral returns, the study finds abnormal
returns on Thursdays for food, industrial miscellaneous, paper and textile and clothing markets.
Furthermore, the highest volatility in returns occurs on Mondays for the industrial
miscellaneous, while the lowest volatility occurs on Tuesdays for food index returns.
Considering the services sub-sectoral returns, the study documents the highest volatility in
returns on Fridays for the media.
This study also testes the RWH, using five different tests, for MIB stock index disaggregated
at the sectoral level. The results obtained indicate that all returns at the sub-sectoral level do
not follow the RWH. The ADF and PP unit root tests, univariate and multivariate variance
ratio test largely cannot reject the RWH. As the data is non-normally distributed, both the
ADF and PP unit root tests could have low-power and the Wright (2000) test could be the
most appropriate; however, the wright test also massively rejects the RWH. One of the
reasons for rejecting the RWH could be identified in the composition of the MIB index.
Further research should be made in that direction by considering the size of each firm listed
in that index and then applying those tests to sub-samples of firms, taking into account
their size.

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Day-of-the-Week Effect and Market Efficiency in the Italian Stock Market: 31

An Empirical Analysis
 Appendix
MIB Sub-Sectoral Indices
Sector Datastream Code
Finance
Banks ITMSBNK(PI)
Finance Holdings ITMSFPA(PI)
Finance Services ITMSFNS(PI)
Insurance ITMSINS(PI)
Industrial
Cars ITMSAUT(PI)
Chemicals ITMSCEM(PI)
Construction ITMSCST(PI)
Electronics ITMSELT(PI)
Food ITMSFOD(PI)
Industrial Miscellaneous ITMSINM(PI)
Paper ITMSPAP(PI)
Plant and Machinery ITMSMAC(PI)
Textile and Clothing ITMSTEX(PI)
Services
Distribution ITMSDST(PI)
Media ITMSPUB(PI)
Public Utilities Services ITMSPSU(PI)
Transport and Tourism ITMST&T(PI)

Reference # 01J-2010-02-01-01

32 The IUP Journal of Applied Finance, Vol. 16, No. 2, 2010

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