In this paper, we first examine the presence of monthly
calendar anomaly in Pakistan Stock Exchange (PSX) using aggregate and
firm-level monthly stock returns. Secondly, we classify the sample firms
into low-beta, medium-beta, and high-beta firms to examine the monthly
anomaly of stock returns for firms having different level of systematic
risk. By considering the stochastic dominance approach (SDA), we employ
the simulation based method of Barrett and Donald (2003) to identify the
dominant month over the period from January 2000 to December 2017. We
find significant evidence of the existence of the January effect in both
firm and market stock returns. We also find that the January effect
exists more prominently in both low-risk and high-risk firms categorised
based on their systematic risk. On the other end of the continuum, for
moderately risky firms, there is strong evidence of the presence of the
December effect. One of possible explanations of the January effect is
the yearend bonus received in the month of January. Such bonuses are
generally used to purchase stocks, causing the bullish trend of stock
prices in January. However, the evidence of the January anomaly in both
low-beta and high-beta portfolios returns is puzzling, suggesting that
investors may invest in both low- and high-risk stocks when
enthusiastically investing in stock market. The findings of the paper
suggest that investors may get abnormal returns by forecasting stock
return patterns and designing their investment strategies by taking into
account the January and December effects and the level of systematic
risk associated with the firms. JEL Classification: G02, G12, G14
Keywords: Behavioural Finance, Stochastic Dominance Approach, Monthly
Anomaly, January Effect, December Effect, TOY Anomaly, Abnormal Returns,
KS Type Test, PSX