The Weekend Effect: A Trading Robot and Fractional Integration Analysis

Abstract

This paper provides some new empirical evidence on the weekend effect, one of the most recognized anomalies in financial markets. Two different methods are used: (i) a trading robot approach to examine whether or not there is such an anomaly giving rise to exploitable profit opportunities by replicating the actions of traders; (ii) a fractional integration technique for the estimation of the (fractional) integration parameter d. The results suggest that trading strategies aimed at exploiting the weekend effect can generate extra profits but only in a minority of cases in the gold and stock markets, whist they appear to be profitable in most cases in the FOREX. Further, the lowest orders of integration are generally found on Mondays, which can be seen as additional evidence for a weekend effect. Keywords IntroductionDetecting calendar effects (anomalies) in financial markets is of interest both to traders aiming to exploit them to gain extra profits and to researchers analysing whether there is evidence of market failure and of the inadequacy of the Efficient Market Hypothesis (EMH). Several papers have tested for their presence using a variety of empirical methods.One of the most frequently studied anomalies is the weekend effect (Monday effect, day of the week effect) first discussed by French (1980), namely the tendency of financial assets to generate negative returns on Mondays. Different theories have been developed to account for its presence. In behavioural finance models it is attributed to the negative expectations of investors considering Monday the worst day of the week. Another possible explanation is that over the weekend market participants have more time to analyse price movements and as a result on Mondays a larger number of trades takes place.Alternatively, it might be due to deferred payments during the weekend, which create an extra incentive for the purchase of securities on Fridays leading to higher prices on that day.Overall, the empirical evidence is still mixed. The present study provides some new results based on two different methods: (i) a trading robot approach to examine whether or not there is such an anomaly giving rise to exploitable profit opportunities by replicating the actions of traders; (ii) a fractional integration technique for the estimation of the (fractional) integration parameter d.The remainder of the paper is structured as follows: Section 2 briefly reviews the literature on the weekend effect. Section 3 outlines the empirical methodology. Section 4 presents the empirical results. Section 5 offers some concluding remarks. (1998, 1999) shows that it has a tendency to disappear and is a phenomenon with two components: the first is the "weekend drift effect", i.e. stock prices tend to decline over weekends but rise during the trading week; the second is the "weekend volatility effect", i.e. the volatility of returns during weekends is less per day than that over contiguous trading days.As for the role of short-selling, Kazemi, Zhai, He and Cai (2013) and Chen ...

The Weekend Effect: An Exploitable Anomaly in the Ukrainian Stock Market?

“…Agrawal and Tandon (1994) examined 19 equity markets around the world, and found the "day of the week" effect in most developed markets. Further evidence was provided by Olson et al (2011), Racicot (2011), Singal and Tayal (2014, and Caporale et al (2014), who found some evidence of a weekend effect in the US stock market, FOREX, and commodity markets as well as in the Russian stock market; in particular, fractional integration techniques suggest that the lowest orders of integration occur on Mondays.…”

“…Further, Caporale et al (2014) show that this anomaly cannot be exploited to make abnormal profits (and therefore it is not inconsistent with the EMH) by taking a trading robot approach.…”