What is the weekend effect?

In the financial markets, a phenomenon known as the “weekend effect” occurs when stock returns on Mondays are sometimes much lower than those on the Fridays that precede them.

The Monday effect is another name for the weekend impact, although according to that hypothesis, Monday stock market returns will mirror Friday’s overall trend. (If the market rose on Friday, it should stay that way over the weekend and start growing again on Monday.)

Understanding the Weekend Effect

Human irrationality is one reason for the weekend effect; individual investor trading activity is at least one aspect contributing to this trend. In situations where ambiguity is present, people often make poor judgments. The irrationality of market participants is occasionally reflected in the capital markets, particularly given the extreme volatility of stock prices and the markets. Outside forces may have an impact on investor decisions, frequently subconsciously. Additionally, Mondays see a higher volume of stock sales by investors, particularly in the wake of negative market news.

Frank Cross noted the peculiarity of negative Monday returns in a Financial Analysts Journal article, “The Behavior of Stock Prices on Fridays and Mondays,” published in 1973. He demonstrates in the paper that there is a variation in the patterns of price fluctuations between Fridays and Mondays, with Fridays having a higher average return than Mondays. On Mondays, stock prices decline after rising the previous business day (typically on Friday). This schedule corresponds to a consistent low or negative average return in the stock market from Friday to Monday.

A few explanations for the weekend impact include that businesses often announce negative news on Fridays after the markets close, which causes stock values to drop on Monday. Others claim there may be a connection between short selling and the weekend effect, meaning that equities with sizeable short interest levels might be impacted. Alternatively, the impact can result from traders’ diminishing confidence from Friday to Monday.

The weekend impact has been a consistent aspect of market trading patterns for many years. A Federal Reserve analysis found a statistically significant negative return over the weekends before 1987. Nevertheless, the research noted that from 1987 to 1998, there was no longer a negative return. Since 1998, weekend volatility has grown again, and the reason for this phenomenon—the weekend effect—is still hotly contested.

Particular Points to Remember

The weekend effect in reverse

Several experts have undertaken research that contradicts the “reverse weekend effect,” demonstrating that Monday returns are, in fact, more significant than returns on other days. Depending on the company’s size, research indicates that there are various weekend impacts, wherein big firms have greater Monday returns and small companies have lower Monday returns. It has also been suggested that the reverse weekend impact exclusively happens in US stock markets.

Conclusion

• In the financial markets, a phenomenon known as the “weekend effect” occurs when stock returns on Mondays are sometimes much lower than those on the Fridays that precede them.
• While the origin of the weekend impact is unknown, one component involved in this trend is the trading activity of individual investors.
• A few explanations for the weekend impact include that businesses often announce negative news on Fridays after the markets close, which causes stock values to drop on Monday.