What Is the 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 sometimes known as the Monday effect, although that theory states that returns on thestock marketon Mondays will follow the prevailing trend from the previous Friday. If the market was up on Friday, it should continue through the weekend and, come Monday, resume its rise, and vice versa. )
Here's how the weekend effect works.
Key Takeaways
- 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.
- Although the cause of the weekend effect is debated, the trading behavior of individual investors appears to be at least one factor contributing to this pattern.
- Some theories that attempt to explain the weekend effect point tothe tendency ofcompanies to release bad news on a Friday after the markets close, which thendepresses stock prices on Monday.
Understanding the Weekend Effect
One explanation for the weekend effect is the tendency of humans to act irrationally; the trading behavior of individual investors appears to be at least one factor contributing to this pattern. Faced with uncertainty, humans often make decisions that do not reflect their best judgment. At times, the capital markets reflect the irrationality of their participants, especially when considering the high volatility of stock prices and the markets; the decisions of investors may be impacted by external factors (and sometimes unconsciously). In addition, investors are more active sellers of stock on Mondays, especially following bad news in the market.
In 1973, Frank Cross first reported the anomaly of negative Monday returns in an article called “The Behavior of Stock Prices on Fridays and Mondays,”which was published in the Financial Analysts Journal. In the article, he shows that the average return on Fridays exceeded the average return on Mondays, and there is a difference in the patterns of price changes between those days. Stock prices fall on Mondays, following a rise on the previous trading day (usually Friday). This timing translates to a recurrent low or negative average return from Friday to Monday in the stock market.
Some theories that attempt to explain the weekend effect point tothe tendency ofcompanies to release bad news on a Friday after the markets close, which thendepresses 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.
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 between 1987 and 1998. Since 1998, volatility over the weekends has increased again,and the cause of the phenomenon of the weekend effect remains a much-debated topic.
Special Considerations
The reverse weekend effect
Opposing research on the "reverseweekend effect" hasbeen conducted by a number of analysts, who show that Monday returns are actually higher than returns on other days. Some research shows the existence of multiple weekend effects, depending on firm size, in which small companies have smaller returns on Mondays andlarge companies have higher returns on Mondays. The reverse weekend effect has also been postulated tooccur only in stock markets in the U.S.
FAQs
What Causes the Weekend Effect? Fed researchers pointed to several reasons behind the Weekend effect: They noticed a disparity between broker recommendations and what investors actually did on the weekend. During the week, investors were too busy to conduct their own market research and followed their brokers' advice.
What are weekend effects? ›
What Is the 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.
What is the weekend effect in the market? ›
Nonetheless, investors should recognize the weekend effect and avoid buying on Fridays and selling on Mondays. Instead, they should buy stocks on Mondays and sell on Fridays. The weekend effect is best defined as a Friday's return minus the following Monday's return for a single security or a portfolio of securities.
What is the weekend effect in options? ›
The Weekend Effect, an observed phenomenon in the stock market, implies that stock returns on Mondays are lower than that of the previous Friday. Stock prices do not necessarily move based on days. Though, historically, the stocks tend to perform better on Fridays than on the upcoming Mondays.
Is the Monday effect real? ›
The Monday effect has been attributed to the impact of short selling, the tendency of companies to release more negative news on a Friday night, and the decline in market optimism a number of traders experience over the weekend. The Monday effect remains a much-debated topic.
What is the weekend effect pollution? ›
The term weekend effect with the intention of describing the weekly behavior of air pollutants emerged and has always been almost exclusively used to describe the behavior of ozone during the weekend (Cleveland et al., 1974; Lebron, 1975; Tonse et al., 2008; Sicard et al., 2020).
How important is the weekend? ›
Weekends provide an opportunity to rest and recharge, so we can start the new week with renewed energy and focus. đź’– Personal Time: Weekends allow us to prioritize personal time for ourselves and our loved ones. This can help us feel more fulfilled and motivated when it comes time to tackle work tasks.
Why do weekends feel so fast? ›
This is due to a variety of factors, including time compression, the length of our days, and our own level of motivation. The next time you feel like your weekend is going by too quickly, just remember that it's a normal phenomenon, and there are steps you can take to make the most of your time.
What makes up the weekend? ›
In most of the world, the workweek is from Monday to Friday and the weekend is Saturday and Sunday. A weekday or workday is any day of the working week.
What is the day of the week effect? ›
The day of the week effect is one of the regularities observed in financial markets which suggests that Friday returns are higher than Monday returns.
Weekend Risk: Some investors may prefer to reduce their exposure to the stock market over the weekend due to potential uncertainties arising during non-trading hours. This cautious sentiment could lead to selling pressure and a slight decline in stock prices on Fridays.
Do stock prices drop over the weekend? ›
We consider the “weekend effect” as having two parts. The first, the “weekend drift effect,” is that stock prices tend to decline over weekends but rise during the trading week. Cross (1973) found that stock prices tend to decline over weekends in the three-day interval from Friday's close to Monday's close.
Do stock prices update on the weekend? ›
No, stock prices do not change when the market is closed on the weekends. The stock market operates on weekdays, typically from Monday to Friday, during regular trading hours. This means that the prices of stocks are determined only when the market is open and trading is taking place.
Is weekend good for trading? ›
While the possibility of trading stocks on the weekend presents unique opportunities, it's not a strategy that suits all investors. The higher volatility, lower liquidity, and potential risks associated with off-hours trading may discourage some investors.
What is the weekend effect in healthcare? ›
In healthcare, the weekend effect is the finding of a difference in mortality rate for patients admitted to hospital for treatment at the weekend compared to those admitted on a weekday.
Why does weekend look like that? ›
If you've been following his work lately, it makes sense. The Weeknd just dropped the music video for his song “Save Your Tears,” and in it he's wearing face prosthetics. (Both the Daily Mail and The Independent report the transformation is the result of time in the makeup chair, not actual surgery.
Why do stock prices change on weekends? ›
Yes, stock prices can change when the market is closed on the weekends. This is because there is still trading happening after hours and pre-market. After hours trading is when investors can buy and sell stocks outside of regular market hours.
What is the Monday effect anomaly? ›
The monday effect, an oft-quoted 1970s stock market theory, suggests that Monday's market open will mirror the previous Friday's close. Some day traders and short-sellers follow the Monday effect because they believe it allows them to plan ahead.
