Academic journal article Journal of Economics and Finance

An Investigation of the Weekend Effect during Different Market Orientations

Academic journal article Journal of Economics and Finance

An Investigation of the Weekend Effect during Different Market Orientations

Article excerpt

Abstract

Studies of stock returns over short horizons indicated irregularities in returns, the weekend effect, and consequently the notion of market efficiency has been questioned. Despite extensive research on the weekend effect, little research has been conducted to define the prominence of the seasonal anomaly in Bear markets versus non-Bear markets. In the paper the weekend effect is investigated for daily returns in the Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ for Bear and non-Bear markets. Results support a weekend effect but only during non-Bear market orientations and a possible day-of-the-week effect during Bear and non-Bear markets.

Keywords Weekend Effect * Efficient Markets * NASDAQ * DJIA * S&P500 Market Performance in Bear and Non-Bear Markets

JEL Classification G1

1 Introduction

Of the many seasonal anomalies, very few are quite as perplexing and as well researched as the anomaly of positive Friday/negative Monday returns called the weekend effect. The weekend effect occurs when stocks display significantly lower returns from the close on Friday to the close on Monday. It has been found in markets worldwide and has been extensively documented by Fama (1965), Cross (1973), French (1980), Lakonishok and Smidt (1989), and Abraham and Ikenberry (1994).

Some empirical research indicates that the negative return on Monday is caused by negative returns occurring on previous trading days. But according to Abraham and Ikenberry, negative returns on Fridays are uncommon; in fact, almost two-thirds of all Fridays produce positive returns. On those Fridays with negative returns, researchers have also found that Monday returns are negative 80% of the time. In contrast, if the Friday returns are positive, then the Monday returns are positive only 50% of the time (Abraham and Ikenberry 1994).

The trading patterns of individual investors appear to be at least one of the causes for the weekend anomaly, as Miller (1988) explains in his individual investor hypothesis. Miller attributes the weekend effect to two factors. First, individual investors initiate greater activity on Mondays, after having had time over the weekend to reflect on their needs. Second, the information provided during the week by the brokerage community, which is biased toward buy recommendations, is less available on weekends (Brooks and Hongshil 1997). These two factors inevitably contribute to the higher percentage of sell orders by individuals on Monday mornings. In addition to the individual investor hypothesis, Abraham and Ikenberry suggest that, "[the weekend effect] is substantially the consequence of information released in prior trading sessions, particularly on Friday," (Abraham and Ikenberry 1994, p. 276). After transaction costs, weekend trading is most profitable in closed end mutual funds after the market declines between 0.5% and 1.5% on Friday (Hsaio and SoIt 2007). Consistent with the weekend effect, implied returns from stock index forecasts entered on weekends are significantly lower than those entered on weekdays (Theissen 2007). Brusa, Pu, and Schulman document evidence of a 'reverse' weekend effect - whereby Monday returns are significantly positive and they are higher than the returns on other days of the week - over an extended period of eleven years (from 1988 to 1998). They also find that the 'traditional' weekend effect and the 'reverse' effect are related to firm size in that the 'traditional' weekend effect tends to be associated with small firms while the 'reverse' weekend effect tends to be associated with large firms. In addition, they find that during the period in which the 'reverse' weekend effect is observed, Monday returns for large firms tend to follow previous Friday returns when previous Friday returns are positive, but they do not follow the previous Friday returns when Friday returns are negative. Furthermore, they find that during the period in which the 'reverse' weekend effect is observed, Monday returns are positively related to the volume of medium-size and block transactions, but negatively related to the volume of odd-lot transactions (Brusa et al. …

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