Definition of the weekend effect

What is the weekend effect?

The weekend effect is a phenomenon in financial markets where Monday stock returns are often significantly lower than the previous Friday.

(The weekend effect is sometimes known as the Monday effect, although this theory states that returns in the stock market on Monday will follow the prevailing trend of the previous Friday. If the market was higher on Friday, it should continue throughout the weekend and, come Monday, resume its climb, and vice versa.)

Here’s how the weekend effect works.

Key points to remember

  • The weekend effect is a phenomenon in financial markets where Monday stock returns are often significantly lower than the previous Friday.
  • Although the cause of the weekend effect is debated, the trading behavior of individual investors appears to be at least a contributing factor to this trend.
  • Some theories that attempt to explain the weekend effect point to the tendency for companies to publish bad news on Friday after markets close, which then pushes stock prices down on Monday.

Understanding the weekend effect

One explanation for the weekend effect is the tendency of humans to act irrationally; the trading behavior of individual investors appears to be at least a contributing factor to this trend. When faced with uncertainty, humans often make decisions that do not reflect their best judgment. Sometimes capital markets reflect the irrationality of their participants, especially given the high volatility of stock prices and markets; investor decisions can be impacted by external factors (and sometimes unconsciously). Additionally, investors are more active sellers of stocks on Mondays, especially following bad market news.

In 1973, Frank Cross first reported the negative Monday returns anomaly in an article titled “The Behavior of Stock Prices on Fridays and Mondays,” which was published in the Journal of Financial Analysts. In the article, he shows that the average return on Fridays has exceeded the average return on Mondays and that there is a difference in the patterns of price change between these days. Stock prices fall on Monday, after rising the previous trading day (usually Friday). This timing results in a low or negative average recurring return from Friday to Monday on the stock market.

Some theories that attempt to explain the weekend effect point to the tendency for companies to publish bad news on Friday after markets close, which then pushes stock prices down on Monday. Others say the weekend effect could be related to short selling, which would affect stocks with high short interest positions. Alternatively, the effect could simply be the result of lower traders’ optimism between Friday and Monday.

The weekend effect has been a regular feature of stock trading models for many years. According to a Federal Reserve study, prior to 1987 there was a statistically significant negative return on weekends. However, the study mentioned that this negative return had disappeared between 1987 and 1998. Since 1998, volatility on weekends has increased again and the cause of the phenomenon of the weekend effect remains a subject of much debate.

Special considerations

The reverse weekend effect

Opposing research on the “reverse weekend effect” has been conducted by a number of analysts, which show that Monday’s returns are in fact higher than returns on other days. Some research shows the existence of multiple weekend effects, depending on the size of the business, in which small businesses have lower returns on Mondays and large businesses have higher returns on Mondays. The reverse weekend effect has also been postulated to occur only in the stock markets in the United States.

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