Academic journal article Journal of Economic and Social Studies

Stock Return and Trading Volume Distribution across the Day-of-the-Week: Evidence from the Japanese Stock Market

Academic journal article Journal of Economic and Social Studies

Stock Return and Trading Volume Distribution across the Day-of-the-Week: Evidence from the Japanese Stock Market

Article excerpt

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Earlier studies on financial framework support widely the efficient market hypothesis of which one implication "is that the expected returns on assets should be evenly distributed across the days, weeks, months, years, or any other unit of time" (Tripathy, 2010). However, observations in the international market context (see Cross (1973) and French (1980) for the US market, Jaffe and Westerfield (1985) for the Japanese and the Australian markets, Syed and Sadorsky, 2006 for the context of emerging markets, Agathee (2008) for the Mauritius market, Ulussever, Guranyumusak and Kar (2011) for the Saudi Arabian market) show that significant variances in assets returns are associated with the unit of time. The day-of-the-week effect is especially common and can be observed in the majority of the aforementioned markets. This specific anomaly constitutes one of several arguments opposing the efficient market hypothesis.

Several hypotheses are given in theoretical and empirical studies to explain the dayof- the-week influence on stock returns and on trading volume. However, in spite of the importance of these hypotheses, the investor's sentiment plays a pivotal role in the decision process. Overconfidence particularly leads investors with greater information to make aggressive decisions and to increase their trading volume on Mondays since they overestimate their knowledge and their judgment skills and underestimate public information and the skills of those with less information. On the contrary, these latter act in a more rational way and delay trades until the market thickens and prices become more informative. Consequently, operations end with abnormal losses and trading volume decreases on Mondays.

The aim of this paper is to investigate the day-of-the-week effect on the stock return in the context of the Japanese market. We chose the specific case of the Japanese market since the Asian population is the most exposed to the overconfidence bias1. Different hypotheses, of which the overconfidence hypothesis is one, are examined to explain the day-of-the-week influence on stock returns and trading volume. In this vein, one question that could have greater importance is:

What explains the influence of the day-of-the-week effect on stock returns and trading volume?

To find some response to this question we used a sample including returns and trading volume of the Nikkei 225 index over the period from June 06, 2002 to Mai 10, 2011. Results show that stock returns and trading volume diminish dramatically on Mondays and increase abnormally over the other days. Results do not support in any special way the outliers' hypothesis, the half-of-the-month hypothesis and the autocorrelation hypothesis. They are, however, consistent with the adverse selection and the overconfidence hypotheses.

The remainder of the paper proceeds as follows. Section 1 presents the literature review on the day-of-the-week influence on the stock returns and gives theoretical explanations. Section 2 summarizes the relationship between the investor's sentiment and the distribution of returns and trading volume. Section 3 provides the sources of the data and a sample selection as well as estimated models. Section 4 contains empirical results. Concluding remarks are provided in the last section.

The day-of-the-week effect on return and trading volume

Earlier studies concerning major international markets show that returns on assets and trading volume are not evenly distributed across days, weeks, months or years. This report is not consistent with the implication of the efficient market hypothesis. In this vein, Foster and Viswanathan (1993) show that in the context of the US market Mondays have abnormal losses, high return volatility and low trading volume.

Mondays' abnormal losses can also be seen in different international markets. Particularly, empirical studies show that Mondays have abnormally low returns and Fridays have significantly high returns (see Lakonishok and Smidt (1988) for the Dow Jones Industrial Average for the period from 1887 to 1986, Keim and Stambaugh (1984) for the S&P500 returns for the period from 1928 to 1982, Schwert (1990) using different sources for the period from 1802 to 1987). …

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