Does Mood Explain the Monday Effect?

Abstract

A number of studies have explored the sources of the Monday effect, according to which returns are on average negative on Mondays. We contribute to the literature by exploring whether a direct measure of mood explains the Monday effect. In line with psychological literature, a greater proportion of investors is more pessimistic in the early days of the week, and become more optimistic as the week progresses. We use novel daily mood data from Facebook across twenty international markets to explore the impact of mood on the Monday anomaly. We find that the Monday effect disappears after controlling for mood. In line with our hypothesis that mood drives the Monday effect, we find that the Monday effect is more prominent within small capitalisation indices and within collectivist and high uncertainty avoidance countries. Investors could consider mood levels to forecast Mondays with more (less) pronounced negative returns.

Investor sentiment in the theoretical field of behavioural finance

“…Additionally, investor sentiment can help explain other anomalies such as fire sales or limit of arbitrage (Yang & Zhou, 2015). Therefore, there is empirical evidence that investor sentiment is related to other behaviours studied in behavioural finance, and to market effects such as the Monday effect (Abu Bakar, Siganos & Vagenas-Nanos, 2014) or bubbles (Feldman, 2010). Research also shows that high investor sentiment can predict low future returns (Frazzini & Lamont, 2008), and that social network sentiment can predict stock market activity (Asur & Huberman, 2010) or stock price movements (Makrehchi et al, 2013;Oh & Sheng, 2011).…”

Investor mood, herding and the Ramadan effect

“…Frieder & Subrahmanyam (2004) examined the impact of the Jewish High Holy Days (i.e., Rosh HaShanah and Yom Kippur) on U.S. stock returns and dollar volume. During both Holy days there is a significant decline in dollar volume, while stock 1 Loewenstein et al (2001); ; Nofsinger (2005), Shu (2010), Summers & Duxbury (2012), Abu Bakar et al (2014) and Siganos et al (2014). returns are significantly positive around Rosh HaShanah and significantly negative around Yom Kippur. 2 Frieder & Subrahmanyam (2004) attribute these phenomena to Jewish investor sentiment.…”

A systematic review of ordinary people, behavioural financial biases

“…Investor sentiment represents an essential role in the arbitration limit, according to Yang and Zhou (2015), who assert that it can be useful to understand a series of financial anomalies: overreaction, lack of reaction, fire sales and the arbitration limit. In line with the psychological literature, Abu Bakar et al (2014) consider that there is a higher proportion of investors with a pessimistic mood in the earlier part of the week, but as the week progresses they become more optimistic.…”

“…The authors have used Facebook's daily mood data across 20 international markets to explore the impact of that mood on the "Monday anomaly/effect", using empirical evidence that investor sentiment is related to other behaviours studied in behavioural finance and, also to market effects (Abu Bakar et al, 2014). Feldman (2010) shows that the rate of perceived losses exceeds all other sentiment measurements and systematic risk in the prediction of future returns in the medium term, especially for one-to two-year outlooks.…”

“…The volume of papers published related to Behavioural Finance has risen exponentially since 2010, both with top referenced journals and other less referenced publications. However, a good number of published papers analyse the behaviour of financial markets and institutional investors, with reduced scope for individual and non-financial investors, such as ordinary consumers (Abu Bakar et al, 2014;Cuomo et al, 2018;Daniel et al, 1998). Specifically, this group remains less researched and constitutes our focus.…”