Weekend Effect on Stock Prices - 2

Continuing further from the first part of this article on Weekend Effect on Stock Prices, here is the second part:

However, the weekend effect has been prominent only in the US & UK stock market along with Japan, while it is completely absent in the other stock markets like Singapore, Malaysia and Philippines.



The case of Japan is an interesting one, because Japan allows Saturday trading during the period of observation of this stock market data. The presence of a strong weekend effect in Japan, which allowed Saturday trading for a portion of the period studies here indicates that there might be a more direct reason for negative returns on Mondays than bad information over the weekend.

Here is something more interesting:
The negative returns on Mondays cannot be justified for a reason of the absence of trading over the weekend. The returns on days following trading holidays, in general, are characterized by positive, not negative, returns – which is completely contradictory to what we observe in case of Monday effect.

Here is a graph showing the returns following the holidays in US – where the weekend effect has been most prominent:



As we can observe from the graph above, the holiday effect has been prominent for positive returns in case of most of the US holidays – except for American Independence day (4th July). The return on 5th July is negative, but still very low compared to the positives that we observe on other days following holidays.

So what can be concluded from these findings and observations?
I really don’t know. The data that is used in the above studies dates back to 1927.

What has happened in the past may not repeat in future. What has happened in USA may not happen in other countries of the world. Give it a shot – offcourse with your luck. And hope to be lucky! :- )

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Weekend Effect on Stock Prices

-- Along with the January effect on the stock prices, there is another effect that has persisted over long periods and over a number of international markets – called the weekend effect.
It attributes to the differences in returns between Mondays and other days of the week.

-- Over the years of observation of stock market data, returns on Mondays have been consistently lower than returns on other days of the week.

This is also termed as the “Monday effect on stock prices”



Reasons for The Weekend Effect:

􀁑 The Monday effect is really called a weekend effect since the bulk of the negative returns is compensated in the Friday close to Monday open returns. The returns from intraday returns on Monday are not the actual reasons in giving away the negative returns.

􀁑 The Monday effect is far more prominent small stocks than for larger stocks.

􀁑 The Monday effect is eqully worse following three-day weekends than two-day weekends.

􀁑 There are some other reasoning like arguments that the weekend effect is the result of bad news being revealed after the close of trading on Friday and during the weekend. Even if this were a commonly observed case, the return behavior would be inconsistent with a rational market,

since rational investors would build in the expectation of the bad news over the weekend into the price before the weekend, leading to an elimination of the weekend effect. However, this effect can still be observed. In the next article, let us discuss about the weekend effect in international markets

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