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
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 to the tendency of companies to release bad news on a Friday after the markets close, which then depresses stock prices on Monday.
What are weekend effects? ›
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.
Is the weekend effect real? ›
The specific diagnoses for which the weekend effect has been documented include acute coronary syndrome, stroke, pulmonary embolism, and selected surgical conditions. It therefore appears that clinical outcomes are worse for patients who are admitted on the weekend.
Does the weekend effect still exist? ›
In a paper entitled “Weekends Can Be Rough: Revisiting the Weekend Effect in Stock Prices,” economist Peter Fortune of the Federal Reserve Bank of Boston found that the weekend effect did, in fact, exist before 1987, but in the years since, negative weekend returns of any statistical significance have disappeared.
What is the weekend effect in psychology? ›
Contemporary psychological research supports the existence of. weekly cyclicity in mood (Cranford et al., 2006). Current findings. specifically suggest two main patterns: The weekend effect, whereby. mood is more positive and less negative on weekends than the rest.
What is the long weekend effect? ›
Weekend effect is used to describe the phenomenon in financial markets in which stock returns on Mondays are often significantly lower than those of the immediately preceding Friday.
What are the effects of a 3 day weekend? ›
A 3-day weekend gives you more time to spend with your family and friends, and it also gives them more time to spend with you. It increases workers' focus, energy, teamwork, and dedication. It reduces stress. Fosters effective collaboration among co-workers.
What is the weekday weekend effect? ›
Introduction. In simple terms, the ozone “weekday/weekend effect” is the occurrence of higher maximum surface ozone concentrations on average in many urban areas on weekends than on weekdays despite lower emissions of ozone precursors, volatile organic carbon compounds (VOCs) and nitrogen oxides (NOx), on weekends.
Why is weekend important? ›
Long weekends provide ample opportunity for people to relax their sleep routines, sleep in later and catch up on lost sleep. In addition, having three mornings a week where you don't have to set your alarm and get up early is a great stress reducer.
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).
Weekends are often considered as the time to sleep more and do things that don't get a chance during the week (e.g., going out on Friday and sleeping in on Saturday). This concept helps people relax and enjoy life. I agree. It feels good to leave the routine life and do things differently.
Why do weekends feel short? ›
It's not just an illusion; weekends really do seem to be shorter than our work periods. This is due to a phenomenon known as time compression. It's a psychological effect that occurs when we become used to a certain routine, causing time to appear to pass more quickly.
What is the Monday effect? ›
The monday effect, an oft-quoted 1970s stock market theory, suggests that Monday's market open will mirror the previous Friday's close.
Why do stocks go down on Friday? ›
Some of the reasons seem to be panic trading behaviour, short-selling, companies' tendency to announce bad news on Fridays after market close, etc. However, the fact to be remembered is that the stock prices do not necessarily move based on days.
What is the 10 am rule in stock trading? ›
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
Why the weekend face? ›
He used prosthetics as part of a storyline for his album, 'After Hours'. When asked why he made an extreme change to his face, describing it as 'increasingly unattractive', whilst promoting his new project, he said: “I suppose you could take that being attractive isn't important to me but a compelling narrative is.”
What is the weekend effect ecology? ›
In simple terms, the ozone “weekday/weekend effect” is the occurrence of higher maximum surface ozone concentrations on average in many urban areas on weekends than on weekdays despite lower emissions of ozone precursors, volatile organic carbon compounds (VOCs) and nitrogen oxides (NOx), on weekends.
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.
