Testing the presence of January effect and impact of the "Charlie Hebdo" terrorist attack on the French market : the case of CAC 40 index

Abstract

Purpose: The main goal of this thesis is to investigate whether the French market is weak and semi-strong from efficient. The weak form efficiency is tested by examining the existence of January effect in the CAC 40 index for ten years. The semi-strong form is also tested by examining the reaction of the CAC 40 index. To one terrorist attack, mainly “Charlie Hebdo” terrorist attack. Design/methodology/approach: A quantitative research design has been employed using two different methodologies. The first one is an ARCH model and its extensions in order to test the January effect, and the second one is an event study methodology to identify the reaction of the French market to the “Charlie Hebdo” terrorist attack. Findings: Findings suggest that the French market is weak and semi-strong efficient. First, January month did not exhibit higher return, suggesting that there is no opportunity for investors to take advantage of any month. Second, there were no significant abnormal returns on the day of the terrorist attack suggesting that the market had directly absorbed the effect of the attack. Research limitations: Testing only one seasonal anomaly (January effect) for a limited period of ten years, and considering only one terrorist attack in the French capital markets are considered the major limitations of this study. Practical implications: Findings imply that technical and fundamental analyses are useless for investors to built profitable strategies. Investors can rely neither on past information nor on publicity available information to make abnormal profits. French Market is efficient and securities prices fluctuate randomly. Originality/value: Market efficiency has become an important issue since different theories as the modern portfolio theory and the Capital Asset Pricing Model highly rely on its assumptions. Testing January effect will add a value for the thesis helping investors in their decision making while considering French securities. Testing the effect of one of the most imperative recent terrorist attacks will also help to determine to what extent developed markets are fast in their reaction to sudden new information.