Day-of-the-Week Effects among Mutual Funds
Journal article by Edward M. Miller, Larry J. Prather, M. Imtiaz Mazumder; Quarterly Journal of Business and Economics, Vol. 42, 2003
Journal Article Excerpt
Day-of-the-Week Effects among Mutual Funds. by Edward M. Miller , Larry J. Prather , M. Imtiaz Mazumder Introduction As discussed in the introductory article by Pettengill (2003), there is a large literature on the Monday effect. A day-of-the-week effect for a particular type of security exists if (1) the returns for that type of security are greater on some days of the week than others (a trading day effect), or (2) the returns on that security over a trading period are not proportional to the number of calendar days affected (a calendar day effect). Because returns for a given day are traditionally measured from the close of the previous trading day, Monday's returns would be computed from Friday's close to Monday's close, a period that includes three calendar days. As discussed in the introductory article, most research shows that Monday returns are radically different from other days of the week and are often negative. Therefore, most of the research on the day-of-the-week effect has focused on the Monday effect, this issue's subject. Monday is only one day of the week, however, and it is important to study the Monday effect in the context of possible differential returns for other days. This is one rationale for including data for days other than Monday in a Monday effect paper. This examination also provides one of this paper's contributions to the literature. Even though the existence of a Monday effect is intellectually interesting, it has been regarded as something that could not be traded profitably. The average weekend decline of 0.089 percent found by Siegel (1998) would amount to only $0.0445 for a $50 stock which is less than the bid-ask spread that prevailed during the period studied. As discussed in the introductory article, many other references make this same point including French (1980), Kim (1988), Bessembinder and Hertzel (1993), Ko and Lee (1993), and Chow, Hsiao, and Solt (1997). (1) Consequently, the only potential for profiting from the day-of-the-week effect through trading individual stocks would be through changing the timing of trades that are already planned, such as timing purchases for Mondays and sales for Fridays. A potentially profitable strategy for exploiting a Monday effect exists if the investor uses mutual funds or variable annuities because, in most cases, investors can escape transaction costs such as bid-ask spreads and commissions. Often, investors can transfer between funds at no expense. This is true for most retirement plans, variable annuities, and mutual fund families, although some mutual fund families and variable annuities restrict the frequency of trades or impose fees. Compton and Kunkel (1999) illustrate that making trades within a tax-deferred, no transfer-cost retirement account can generate high risk-adjusted returns. Using the TIAA-CREF's accounts, they propose switching to CREF's stock account on Monday and then switching back to CREF's money market account on Friday, earning three days (Saturday, Sunday, and Monday) of returns over the weekend. They suggest that their trading strategy can be applied to other retirement accounts and to variable annuities, but they fail to test the strategy with other fund groups. Therefore, our second contribution to the literature is that we extend the work of Compton and Kunkel (1999) by providing such tests here. Our results for mutual fund asset classes should also extend to other retirement accounts, which frequently permit transaction free exchanges between funds. The reason for this is that we examine asset class returns that are fabricated from actual mutual funds that are used as the investments in these types of accounts. These retirement accounts have the additional virtue of being tax deferred, and hence they do not generate the steady stream of highly taxed short-term capital gains that would be generated by a trading strategy applied to mutual funds in a taxable account. Using retirement accounts also avoids the heavy tax-accounting burden that would accrue from the numerous transactions that would be required to exploit a day-of-the-week effect in individual stocks. Extant research suggests that there are advantages to examining the returns from different types of stock funds because it is probable that various types of stocks have different patterns for a weekly effect. Sias and Starks (1995) find that the day-of-the-week anomaly is largest for institutional stocks, suggesting that the effect would be bigger for mutual funds than for portfolios of individual stocks. Thus, our third contribution to the literature is to examine various types of stock funds to ascertain the similarity of calendar effects for various asset classes.At this point it is important to ... |
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