The Day of the Week Effect

Topics: Metal, Economics, Random walk hypothesis Pages: 4 (1068 words) Published: April 16, 2013
Bishop’s University
Department of Economics

The “Day-of-the-Week” Effect:
Analysis of Trends in the Daily Returns of Copper and Aluminum

Lucas Zawislak and Jennifer Lee

Dr. M. Vigneault

Applied Economic Analysis

March 15th, 2013


According to the neoclassical school of economics, asset markets are assumed to be both efficient and random. These two assumptions are the base from which two neoclassical theories are derived: 1) “The Efficient Market Theory” infers that the market is remarkably adept in its utilization of information; while 2) “The Random Walk Model” infers that accurate predictions of outcome cannot be made on the basis of historical data. In summation, it is assumed that the price behavior of assets is essentially random, and all relevant information is almost immediately incorporated into price.

There are two key elements, in reference to market participants or decision makers, engrained in the neoclassical position. First, it is presumed that the decision maker is rational and therefore makes decisions using the expected utility function. Second, this position reasons that each decision maker has access to, and uses, full information about the fundamental valuations of assets. Consequently, the market should be comprised of distinctly independent, fully informed and rational decision makers.

Contrary to the neoclassical belief’s studies have uncovered irregularities, in asset returns, over specific ranges in time, specifically over the days of the week. This observed anomaly is commonly referred to as “The-Day-of-the-Week-Effect” which challenges the notion of market efficiency and randomness. It proposes that the distribution of returns may vary according to the day of the week. The most distinct characteristic of this anomaly is a pattern of positive returns on Friday coupled with negative returns on Monday, also known as “the weekend effect”.

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