The weekend effect refers to the tendency for stock prices to be lower on Mondays than on the previous Friday.pixabay
The “weekend effect” is a notable trend noted in stock markets around the world. The weekend effect, also known as the Monday effect, refers to an abnormal phenomenon in which stock prices are high on Fridays and relatively low on Mondays after the weekend.
Let’s take a look at how noticeable this effect is and some of the reasons behind it.
Weekend effect – perennial anomaly
Research shows this effect has existed as far back as 1885.
This pattern, first identified by Gibbons and Hess in 1981, is inconsistent with expected behavior as determined by market efficiency theory.
The efficient market hypothesis states that stock prices are random and investors cannot use past prices to make abnormal profits.
According to these theories, anomalies like the weekend effect should not exist because they contradict the concept of market efficiency and imply regular patterns of price movements that can be predicted and exploited. It will be. The weekend effect pattern in returns and volatility allows investors to take advantage of relatively regular market changes.
Weekend impact on Indian stock market
Specific studies focused on the Indian stock market, such as a study by Roger Ignatius in 1992 and later by Goraka Nath and Manoj Dalvi in 2004, found that the weekend effect was mildly present during the respective study periods. confirmed. Although researchers have confirmed its existence, they have struggled to pinpoint the definitive cause of the effect in the Indian context.
Why is the market gloomy on Monday?
Some researchers believe that part of the weekend effect is due to the settlement period. The Indian stock market mainly follows the T+1 payment system. This means that transactions related to stock purchases take one business day to settle.
If an investor purchases shares on Monday, he or she must pay for the shares by Tuesday. Stock purchased on Tuesday must be paid for and delivered by Wednesday. However, the stock market is closed on Saturdays and Sundays, so trades made on Friday must be settled on Monday. This means investors who bought stocks on Friday will have two additional days to pay for their purchases. This means that the buyer can hold the stock and pay for it two days later than usual.
For people investing or trading large sums of money, such as institutional investors, these two extra days mean two days less in interest payments (as opposed to taking out a loan to buy stocks). ). Therefore, buying activity is likely to increase on Friday.
The market could rise on Friday as demand for the stock increases due to the buy preference.
From another perspective, it is believed that companies tend to announce unfavorable news after the market closes on Friday. This is because it takes investors two days to absorb bad news, reducing the impact on the stock price a little. The reaction to the bad news then appears on Monday in the form of a decline in investor confidence and a sell-off of stocks. This could contribute to the stock market decline at the beginning of the week.
mystery remains
Various models attempt to explain changes in stock returns by analyzing fundamental factors such as a company’s financial information. However, there are still some aspects of these variations that cannot be explained by these models. These unexplained fluctuations can be attributed to factors such as trends in fundamental factors, business cycles, and news events that affect investor sentiment. Despite many studies, the “weekend effect” in stock returns remains a complex phenomenon that is not fully understood by traditional financial theory. This effect can be influenced by institutional behavior, news timing, and investor sentiment.
Based on opinions from agents
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