What is Monday Effect
Monday effect is a theory that states that returns on the stock market on Mondays will follow the prevailing trend from the previous Friday. Therefore, if the market was up on Friday, it should continue through the weekend and, come Monday, resume its rise. The Monday effect is also known as the "weekend effect."
BREAKING DOWN Monday Effect
Some studies have shown a similar correlation, but no one theory has been able to accurately explain the existence of the Monday effect. The rationale or reason for the existence of the Monday effect are not well understood. However, when reviewed in terms of weekly trading, on any given Monday, equity markets experience opening performance that mirrors Friday's closing performance.
For examaple, consider the Dow Jones closes on a Friday at 20,000, and it has been climbing steadily during the last hour of trading. According to the Monday effect, once the Dow Jones re-opens the next Monday morning, the upward performance will continue for the first hour or so of trading. From 20,000, the Dow Jones might rise during the early hours of trading.
History of the Monday Effect
Frank Cross first reported the anomaly of the Monday effect through a 1973 article entitled “The Behavior of Stock Prices on Fridays and Mondays,” published in the Financial Analysts Journal. In the article, he demonstrated that the average return on Fridays exceeded the average return on Mondays, and that there is a difference in the patterns of pricing changes throughout the day. The traditional outcome of the Monday effect is an anomaly indicates a dip on Mondays following a rise on the previous trading day, usually Friday. It usually results in a recurrent low or negative average return from Friday to Monday in the stock market.
Some theories say the Monday effect has a lot to do with the tendency of companies to release bad news on a Friday, after markets close, which then depresses stock prices on Monday. Others think the Monday effect might be attributed 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 mainstay anomaly of stock trading for 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 after 1987 until 1998. Since 1998, volatility over the weekends has increased again, and the phenomenon of the Monday effect remains a much debated topic