Discussion for Day of the Week Effect

Topics: Scientific method, Standard deviation, Theory Pages: 2 (418 words) Published: May 4, 2013
The findings show that the day of the week effect exists in Malaysian market as they demonstrate negative mean return on Monday and high mean return on Friday. There are no existing theories which explain the day of the week effect in stock market. It is difficult to give an exact explanation why these kinds of patterns exist in security returns. However, some of the assumptions can be used in explaining this scenario.

First of all, Monday depicts negative return due to its high volatility. Based on the empirical studies, Monday has high standard deviation of return, which means high volatility. This shows that trading in the market on Monday possess high risk, thus investors are not interested to trade on Monday. As a result, share price falls and this brings negative mean return.

Secondly, the most unfavorable news usually appears during the weekends. Tong (2000) suggests that the negative Monday effect is probably a response of individual investors to bad news received on Friday. These unfavorable news influence the majority of the investors negatively, causing them to sell on the following Monday. This explains the negative mean return on Monday. Pettengill (2003) provides a similar explanation which arises also from the behavior of individual investor. He suggests that investors avoid buying securities on Mondays because they are afraid of the potential loss from trading with well informed traders who might be selling based on unfavorable information they have received during the weekend. Thus, the return on Monday will be significantly low.

Besides, Elton and Gruber (1995) suggest that because hundreds of researchers study the same data, it is possible that patterns will be found and these patterns are random. When many researchers study the same data, they might be able to predict the pattern or the trend of the stocks.

Another satisfactory factor which explains the day of the week effect might be investor psychology. They point out...
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