Weekend Effects on Stock Returns: A Note

TLDR: In this article, the authors argue that the expected stock returns as measured, for example, from closing to closing prices, should depend on the day of the week, and that the returns on Fridays should be higher than would be implied simply by a trading time or calendar time model.

Abstract: SOME RESEARCHERS HAVE APPARENTLY been surprised to discover that the distribution of stock returns depends on the day of the week.' Kenneth French [3], for example, in testing whether daily stock returns are generated by a trading time or calendar time hypothesis, provided convincing evidence of a negative market return on Mondays. As French carefully notes, this finding runs counter to both hypotheses, since a trading time view would have expected stock returns equal on different days, and a calendar time view would have higher expected returns on Monday to compensate for the longer holding period. In this paper we offer a partial explanation for the apparently puzzling discovery of different daily returns. We argue that the expected stock returns as measured, for example, from closing to closing prices, should depend on the day of the week. In general, we argue that the expected returns on Mondays should be lower than would be implied simply by a trading time or calendar time model, and the returns on Fridays should be higher. In addition, we anticipate that holidays will have complex effects on stock returns on other days of the week. Our argument is based on the delay between trading and settlements in stocks and in clearing checks. The explanation that we offer for different measured daily returns does not contradict the efficient market hypothesis, as correctly adjusted expected returns should not differ according to the day of the week.