RESEARCH METHODOLOGY

3. Research Design

3.1 Research Approach

The research approach employed in this applied finance project is deductive reasoning, because this research paper first reviewed previous empirical studies and theoretical principles so as to develop its own research hypotheses and subsequently employed statistics and regression models to test the proposed research hypotheses, which fits in line with the definition of a deductive research approach, according to Saunders et al. (2016). In addition, it is also suggested that deductive reasoning is a more suitable research approach for quantitative studies, as it allows the researcher to examine the underlying subject from the particular data sets to the general conclusions (Bryman and Bell, 2015). In this sense, this research project aims to examine the existence of holiday effects in the UK stock market by examining a particular index (FTSE 100), which also corresponds to deductive reasoning.

 

3.2 Research Method

The research method that will be used in this study is the quantitative method. The quantitative method can be described as a research method in which both mathematical and statistics functions are used in order to test objective theories that will assists in examining if a relationship exists between the variables being examined (Saunders et al, 2016). There are various reasons why the quantitative research method was used. Firstly, the quantitative method allowed the research to be more objective and the results to be more accurate (Bryman and Bell, 2015). Since this research seeks to analyse whether there is an existence of any holiday effects in the UK stock market, using the quantitative method will be very useful in examining this factor. The use of quantitate research method allows the generalization of the phenomena under study by using variables. Therefore, by using qualitative research method, the phenomena under study which is to examine the existence of holiday effects in the UK stock market by examining the FTSE 100 index will be generalized by using both pre-holiday, holiday and post-holiday performance in the stock market. Moreover, the use of quantitative research method allows the results of the research to be compared to other studies. This is important as it will assist in authenticating the results of this study.

 

3.3 Propose the Research Hypothesis

A research hypothesis is important as it assists in bringing direction to the study. The research hypothesis of this study will be connected to the research aim and objectives of the study. The research hypothesis that will be investigated will be:

H1: UK stock returns behaved differently around holidays during 2008-2017

Ho: UK stock returns did not behave differently around holidays during 2008-2017

Therefore, in understanding more about the holiday effect, the research hypothesis above will be investigated in order to understand whether the UK stock returns behave differently around holidays and if they do so, what is the reason why these anomalies exist.

 

3.4 Data Sources and Description

3.4.1 What was the data?

The data that was used in this survey was retrieved from the UK stock returns. The index that was used to analyse the existence or absence of anomalies is the FTSE 100 INDEX. The FTSE 100 mainly consist of 100 companies which are listed in the London Stock Exchange. The reason why this data was chosen is because the FTSE 100 is normally used to gauge a company’s success in the UK. This means that the companies listed in the FTSE 100 will greatly reflect on the performance of the companies in the UK after the financial crisis of 2008. The data that was retrieved was based on a 10-year period which is from 2008 to 2017.

 

3.4.2 Where was the data retrieved?

The data which as discussed above was from the FTSE 100 index was retrieved from yahoo finance. The reason why the yahoo finance was used is because Yahoo finance has been in the industry for over twenty years. This means that yahoo finance is a reliable source for retrieving financial information about a company. In addition to that, yahoo finance provides not only current financial information about a country but it also provides a detailed financial information. This means that the site will be useful when it comes to retrieving the FTSE 100 stock returns data from the year 2008 to 2017.

 

3.4.3 Characteristics of the data

The data that will be used will be mainly from the FTSE 100 companies. This data will be based on the daily stock returns of the FTSE 100 companies. Moreover, in order to compare whether the holidays usually perform differently, the main holidays in the UK will be used. In the UK, there are 17 holidays that are documented. Therefore, the data that will be retrieved will be mainly based on the 17 holidays as the investigation of this essay is mainly based on whether the holidays have any effect on the stock daily returns. The image below shows the dates of the holidays in the UK.

 

 

3.4.4 Variable measurement

In analysing whether the holidays have any effect on stock returns, the holiday effect will be used as an independent variable. The holiday effect in this case means “the tendency of stock returns to be higher on any day before a holiday”. The dependent variable that will be used in this study is the daily stock returns. This means that there are higher mean returns of preholiday periods if a comparison is made to other trading days.

 

3.5 Model Estimation and Hypothesis Testing

3.5.1 Data Analysis

The data that was collected will be analysed using three main methods. They include the descriptive statistics, correlation and regression analysis. The descriptive statistics will be mainly used to describe the main characteristics of the data that was collected. The data was mainly partitioned surrounding the main holidays. That is the pre-holiday a day before the holiday. In analysing the days, the close to close basis and the open to close basis of the day was used.

The first step of the data analysis mainly consisted of the daily stock return data which ranged from 1^st January 2008 to 1^st January 2017. The data was a 10-year period in which the years that were put in to consideration mainly happened after the financial crisis. The daily stock returns were analysed in the absence of the main holidays in the United Kingdom. In comparing the mean returns, respective mean return of 1.12 was observed. However, the main issue that was arising is the difference that existed between the pre holidays and the daily stock return. However, the data is not shocking as the days happened to be 28 times more than the trading days. Moreover, the standard deviation of the pre-holiday returns seemed to be lower than that of the daily stock returns.

After the descriptive analysis of the results in which the daily trading stock and the pre-holiday were considered, the correlation and regression analysis were considered. The correlation was used to investigate whether there the pre-holiday and the daily stock returns were related. This was important as it assisted in showing that the two data sets were related.  The regression analysis that was used in this study was mainly employed to show whether there was a relationship between the preholiday variable and the daily stock returns variable. This was important in assisting us to determine whether there was an existence of the holiday effect after the financial crisis in the UK.