Beyond The Random Walk: A Guide to Stock Market Anomalies and Low-Risk Investing
Published:
2003
Online ISBN:
9780197702550
Print ISBN:
9780195158670
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Vijay Singal, PH.D., CFA
Pages
40–55
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Published:
December 2003
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Singal, Vijay, 'The Weekend Effect', Beyond The Random Walk: A Guide to Stock Market Anomalies and Low-Risk Investing (
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Abstract
The weekend effect refers to relatively large returns on Fridays compared to those on Mondays. Whereas the Friday returns exceed 0.20%, the Monday returns are close to zero or negative resulting in a weekend effect for an equally weighted index of 0.34 percent. On the other hand, the weekend effect for a value-weighted index has fallen to zero during the 1990s.
Short sellers may be responsible for the weekend effect because they do not want to keep speculative positions open around the weekend. Accordingly, they close the short positions by buying back on Fridays and reopen them by short selling on Mondays causing higher returns on Fridays and lower returns on Mondays.
It is, however, not easy to capture the weekend effect with current financial instruments because the trading costs can be large. Nonetheless, investors should recognize the weekend effect and avoid buying on Fridays and selling on Mondays. Instead, they should buy stocks on Mondays and sell on Fridays.
The weekend effect is best defined as a Friday’s return minus the following Monday’s return for a single security or a portfolio of securities. This definition captures the preweekend positive returns (higher returns on Fridays) and the postweekend negative returns (lower returns on Mondays). In the absence of seasonality in returns, firms should, on average, earn the same return on all days of the week, especially on adjacent trading days.
Keywords: security, portfolio, definition, postweekend, seasonality
Subject
Collection: Oxford Scholarship Online
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