A Survey on the Weekend Effect

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A Survey on the weekend effect |
Student number: 6239005 |

Contents page:

Description of the weekend effect | Page 2 |
How does the weekend effect influence the market efficiency? | Page 3 | What are the possible reasons behind the weekend effect? | Page 4 | Why does the weekend effect matter to both academics and practitioners? | Page 5 | What has now happened to the weekend effect? | Page 6 | Bibliography | Page 8 |

Unusual stock market return activities has been a major topic of empirical finance research for a few decades now. Seeing the objectives of an investor are to always make profitable investments, they will jump for opportunities where abnormal profits can be made due to market inefficiency. Over the past 40 years, researchers have identified a number of inconsistent empirical results with maintained asset-pricing theories; these are called financial market anomalies. The term “anomaly” itself can be traced back to Kuhn (1970) in his book “The structure of scientific reductions”. Financial anomalies that are associated with time are called calendar effects. Examples of these include the turn-of-the-month effect, the January effect and the weekend effect. Description of the weekend effect

The financial anomaly which will be closely observed in this research is the weekend effect. “The weekend effect is a phenomenon in financial markets where stock returns on Mondays are often significantly lower than those of the immediately preceding Friday.”[1] Since most financial markets close on the Friday evenings for the weekend, this means Monday returns span over three days. Therefore, it could be expected that returns on a Monday should be higher than returns for other days of the week due to the longer period. In actual fact, Monday is the only weekday with a negative average rate of return. The weekend effect was first pointed out in 1973 by Frank Cross in the US markets. It was then documented in 1980 in the Journal of Financial Economics by Kenneth French, one of the first to prove the existence of this anomaly by studying the daily returns to the Standard & Poor’s (S&P) composite portfolio from 1953 to 1977. Donald Keim and Robert Stambaugh carried on further investigation in 1984. Michael Gibbons and Patrick Hess added more evidence of negative Monday returns for the 30 individual stocks of the Dow Jones Industrial Index in 1981. French showed that the return for Monday was negative and lower than the average return for any other day. He also showed that the results contradict the calendar and trading time models which state that returns are only generated during trading periods and mean returns are the same for all trading days of the week. The histogram below illustrates the difference between the return for Monday compared to those of the other days of the week. C:\Users\Ben\Desktop\University\Year 2\Managing Money Finance\Coursework\french.jpg[2] From these histograms, it can clearly be seen that the mass of the returns for Monday is mostly in the negative region whereas the mass for the other days is more centred towards the positive region with Wednesdays and Fridays standing out, having higher returns than other days. How does the weekend effect influence the market efficiency? Anomalies often show evidence of market inefficiency as they contradict the efficient market hypothesis (EMH), founded by Eugnene Fama (1960), which states that “stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.”[3] EMH indicates investors should not be able to make profit opportunities by buying under-priced stocks or selling them at inflated prices. The reason for this is because stocks should always be traded at their fair price. EMH states that it is not possible to outperform the market (except through luck). However it is technically possible for...
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