Weekend Effect

The weekend effect is a phenomenon in financial markets in which stock returns on Mondays are often significantly lower than those of the immediately preceding Friday.

The weekend effect is also known as the Monday effect.

In a perfect world, human beings are perfectly rational and are capable of processing all information and making optimal choices with perfect information. However, the capital markets reflect the irrationality of its participants, given the high volatility of stock prices and the markets. External factors at play influence the decisions of investors, sometimes unconsciously. One behavioral theory that shows the irrationality of players in the market is the weekend effect.

In 1973, Frank Cross first reported the anomaly of negative Monday returns through an article titled “The Behavior of Stock Prices on Fridays and Mondays,” published in the Financial Analysts Journal. In the article, he shows that the average return on Fridays exceeded the average return on Mondays, and that there is a difference in the patterns of price changes between those days. The weekend effect is an anomaly that sees stock prices fall on Mondays following a rise on the previous trading day, usually Friday. The timing translates to a recurrent low or negative average return from Friday to Monday in the stock market.

Some theories that explain the effect point to the tendency of companies to release bad news on a Friday after the markets close, which then depresses stock prices on Monday. Others state that the weekend effect might be linked to short selling, which would affect stocks with high short interest positions. Alternatively, the effect could simply be a result of traders' fading optimism between Friday and Monday.

Opposing research on the "reverse weekend effect" has been conducted by a number of analysts, who show that Monday returns are actually higher than the returns on other days. Some of the research done shows the existence of multiple weekend effects, depending on firm size, in which small companies have smaller returns on Mondays and large companies have higher returns on Mondays. The reverse weekend effect has also been postulated to occur only in United States stock markets.

The weekend effect has been a regular feature of stock trading patterns for many years. According to a study by the Federal Reserve, prior to 1987 there was a statistically significant negative return over the weekends. However, the study did mention that this negative return had disappeared in the period after 1987 until 1998. Since 1998, volatility over the weekends has increased again, and the phenomenon of the weekend effect remains a much debated topic.