A New Look at the Monday Effect

Abstract

It is well documented that expected stock returns vary with the day-of-the-week (the Monday or weekend effect). In this article we show that the well-known Monday effect occurs primarily in the last two weeks (fourth and fifth weeks) of the month. In addition, the mean Monday return of the first three weeks of the month is not significantly different from zero. This result holds for most of the subperiods during the 1962-1993 sampling period and for various stock return indexes. The monthly effect reported by Ariel (1987) and Lakonishok and Smidt (1988) cannot fully explain this phenomenon. ONE OF THE MOST PUZZLING empirical findings reported in finance isthe significantly negative average Monday stock return. After French (1980) documented the unusual stock returns over weekends, numerous studies confirmed the Monday (or weekend) effect using various time periods and different stock return indexes. This anomalous Monday return pattern exists not only in the U. S. stock market, but also in foreign stock markets (see, for example, Jaffe et al. (1989)) and across different types of securities (see, for example, Flannery and Protopapadakis (1988)).Numerous explanations have been developed to rationalize the puzzling discovery of persistent negative daily returns. Lakonishok and Levi (1982) attribute the effect to the delay between trading and settlements in stocks and in clearing checks. However, they also report that only about 17 percent of the abnormally low Monday returns can be explained by the settlement period. Keim and Stambaugh (1984) report that neither measurement-error nor specialist-related explanations can explain the Monday effect. Flannery and Protopapadakis (1988) also suggest that institutional aspects of the stock market cannot explain the Monday effect.Lakonishok and Maberly (1990) document that individuals tend to increase trading activity (especially sell transactions) on Monday, which they believe might explain part of the weekend effect. Kamara (1995) provides evidence that individual trading is an important cause of the Monday seasonal by noting that the magnitude of the Monday effect for the S&P 500 declined significantly over the 1962-1993 period, a period of increased institutional trading activity. We thank an anonymous referee and the editor, who provided specific comments that greatly improved the article. The usual disclaimer applies. 2172The Journal of Finance However, Sias and Starks (1995) report that the day-of-the-week patterns in returns and volumes are more pronounced in securities in which institutional investors play a greater role.Rogalski (1984), among others, documents that the average negative Monday return occurs during the nontrading period from Friday's close to Monday's opening (the weekend effect). Along this line of thought, Damodaran (1989) shows that firms tend to report bad news on Fridays and suggests that the delay of announcements of bad news might cause the negative Monday effect. However, he also reports that the delay of announcements of bad news on Friday ...

Calendar anomalies: Review of literature

“…There are number of studies which have supported the Monday effect in the stock markets (Alt et al, 2011;Cho et al, 2007;Jaffe et al, 1989). However, other studies support the ef icient market hypothesis and are not in line with the Monday effect (Bhana, 1985;Diaconasu et al, 2012;Mehdian and Perry, 2001;Wang et al, 1997). Also, Ajayi et al (2004) Seyyed et al (2005) found the existence of Ramadan effect in Saudi Arabia.…”

Financial market anomalies: evidence from Tunisia stock market

“…Then, researchers interested in this kind of anomaly in their turns applied a strategy derived from Ariel's findings to make more clear that stock market returns are generally higher on the last day of the month and the first days of the next month. More precisely, the returns during the first week of a month tend to be significantly positive, while the returns during the other weeks of a month are statistically indistinguishable from zero (Wang et al, 1997;Kohers and Patel, 1999).…”

Stock Return and Trading Volume Distribution across the Day-of-the-week: Evidence from the Japanese Stock Market

“…Moreover, authors Wang, Li and Erickson (1997) distinguish between days of the first and of the latter half of the month. They consider that the day-of-the-week effect on the stock return changes according to whether the day comes in the first or the latter half of the month.…”