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An Examination of the Day-of-The-Week Trading Patterns of Individual and Institutional Investors
Abstract
This study examines the day-of-the-week trading patterns of individual and institutional investors. Consistent with previous evidence, we find an increase in the proportion of trading volume accounted for by individual investors on Monday. However, we document that this increase in the fraction of trading by individual investors on Monday is a result of a reduction in trading by institutional investors, and not because of an increase in trading by individual investors. In fact, the trading by individual investors is significantly lower on Monday than on any other weekday. We also document that the degree of day-of-the-week variation in trading volume by individual and institutional investors is positively associated with the quality and dissemination of public information proxied by the market capitalization of each company.
... Em todo o caso, existe um outro grupo de estudos referentes ao mercado americano, mais atuais e com aplicações econométricas mais sofisticadas que evidenciam o fim do efeito dia da semana. Entre estes estudos podemos destacar o de Narayan et al. (2014) e Morse et al. (2014). ...
... A sample firm based on its market capitalization by the end of the year prior to its spinoff announcement year is assigned to one of the deciles constructed with the same year-end market capitalizations of the universe of NYSE/AMEX/NSADAQ firms. Consistent with the previous studies on trading volume (e.g., Llorente et al., 2002;Lo and Wang, 2000;Morse et al., 2014), trading volume and volume turnover increase with firm size as does the prices of the sample firms despite the small sample size of our study. As can be seen in the table, across the sample trading volume is far more variable than volume turnover. ...
This study analyzes the effect of changes in the level of differences of opinion (DO) associated with the public disclosure of spinoff divesture on stock prices. The framework for the empirical analysis is the application of a dynamic DO model of Banerjee and Kremer (2010) to Miller (1977)’s DO model. From this framework, we derive three testable hypotheses, specifically, focusing on the effects of a change in the level of DO from the ex-ante level to the event level caused by the announcements of corporate spinoff engaged and completed by firms in the U.S from 1964 to 2005. We show that the announcements spark sudden and sharp increases in the level of DO. These increases or the disagreement shocks are positively correlated with the abnormal returns generated by the announcements. Furthermore, firms with low ex-ante levels of DO—the mean degree of disagreement among investors about a firm value in a normal trading day—tend to generate greater disagreement shocks. The implication of this negative correlation between the ex-ante level of DO and the disagreement shock is that there should be also a negative relationship between the ex-ante level of DO and the abnormal return. We confirm this relationship. Therefore, the ex-ante level of DO as a firm trait defined by investors’ behavioral characteristic can be a significant determinant for the well-known wealth effect or the on-average positive abnormal return gained by corporate spinoffs.
The aim of this study is to determine whether the DOW effect still exists, and to evaluate empirically the explanations of the DOW effect for international equity markets. Evaluating 51 markets in 33 countries for the period between January, 2000 and December, 2007, reveals that the DOW effect persists for a significant proportion of equity markets. Evaluating open-to-close returns, liquidity, size effect and possible spill-over effects, the DOW effect can be explained for almost of all the exchanges. Individual stock analysis, covering 37,631 stocks traded in 51 equity markets shows that a DOW effect in returns exists for a statistically significant proportion of individual stocks in almost all of the markets in the study. Even markets without a market-level DOW effect contain a surprisingly large proportion of stocks with individual-level DOW effects. Interestingly, this proportion is only marginally lower than that which is found in markets with a market-level DOW effect.
This study tests the presence of the day of the week effect on stock market volatility by using the S&P 500 market index during
the period of January 1973 and October 1997. The findings shown that the day of the week effect is present in both volatility
and return equations. While the highest and lowest returns are observed on Wednesday and Monday, the highest and the lowest
volatility are observed on Friday and Wednesday, respectively. Further investigation of sub-periods reinforces our findings
that the volatility pattern across the days of the week is statistically different.(JEL G10, G12, C22)
It is well documented that the mean Monday return is significantly negative and is lower than the mean return on other weekdays. Using institutional stock holdings information during the 19811998 period, we document that the Monday seasonal is stronger in stocks with low institutional holdings and that the Monday return is not significantly different from the mean Tuesday to Friday returns for stocks with high institutional holdings during the 19901998 period. Our study provides direct evidence to support the belief that the Monday seasonal may be related to the trading activities of less sophisticated individual investors.
In an adverse selection model of a securities market with one informed trader and several liquidity traders, we study the
implications of the assumption that the informed trader has more information on Monday than on other days. We examine the
interday variations in volume, variance, and adverse selection costs, and find that on monday the trading costs and the variance
of price changes are highest, and the volume is lower than on Tuesday. These effects are stronger for firms with better public
reporting and for firms with more discretionary liquidity trading.
Studies have suggested that individual investor behavior is the primary cause of the weekend effect. This examination of differences in the daily returns of securities held primarily by individual investors versus securities held by institutional investors indicates that institutional behavior is the primary source of day-of-the-week return differences. Day-of-the-week patterns in returns and volumes are more pronounced in securities in which institutional investors play a greater role.
I examine intraday stock returns in the Istanbul Stock Exchange (ISE) around nontrading periods - weekends and holidays - by utilizing the exchange's structure of two trading sessions. I find that returns are generally more positive in the last session on Fridays and more negative in the first session on Mondays. The results also indicate that the weekend effect has disappeared in the ISE in recent years. I further find some evidence that there is a relationship between the length of a holiday nontrading period and returns around it. The longer a nontrading period is, the more positive the returns are in the morning session before the holiday and the less positive the returns are in the morning session after the holiday. My findings indicate the importance of the uncertainty imposed on stock returns by the length of a nontrading period.
It is well known that stock returns, on average, are negative on Mondays. Yet, it is less well known that this finding is substantially the consequence of returns in prior trading sessions. When Friday's return is negative, Monday's return is negative nearly 80 percent of the time with a mean return of -0.61 percent. When Friday's return is positive, the subsequent Monday's mean return is positive, 0.11 percent. This relationship is stronger than for any other pair of trading days and is most acute in small- and medium-size companies. The trading behavior of individual investors appears to be at least one factor contributing to this pattern. Individual investors are more active sellers of stock on Mondays, particularly following bad news in the market.
This study separates trading volume into buyer- and seller-initiated activities and examines the directional volume reaction in small and large trades to different types of earnings news. ‘Good’ (‘bad’) news triggers brief, but intense, buying (selling) in the large trades. However, a persistent period of unusually high buying activity is observed in the small trades irrespective of the news. This anomalous proclivity of small traders to buy is robust across firm size, trading volume, and different earnings expectation models. Several explanations are discussed, although the behavior does not seem fully explained by existing theories.
This paper examines two alternative models of the process generating stock returns. Under the calendar time hypothesis, the process operates continuously and the expected return for Monday is three times the expected return for other days of the week. Under the trading time hypothesis, returns are generated only during active trading and the expected return is the same for each day of the week. During most of the period studied, from 1953 through 1977, the daily returns to the Standard and Poor's composite portfolio are inconsistent with both models. Although the average return for the other four days of the week was positive, the average for Monday was significantly negative during each of five-year subperiods.
Minimum Absolute Deviation (MAD) estimation method is used to examine weekday anomaly in 18 international stock exchanges between 1990 and 2003. Weekday return anomaly is found with OLS method in two and with MAD method in eight stock exchanges. Empirical test distributions of F -type test for OLS and MAD estimators with Laplace errors were derived with simulations.
We argue that short sellers affect prices in a significant and systematic manner. In particular, we contend that speculative short sales contribute to the weekend effect: The inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on Fridays and reestablish new short positions on Mondays causing stock prices to rise on Fridays and fall on Mondays. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks. Copyright 2003 by the American Finance Association.
Patterns in stock market trading volume, trading costs, and return volatility are examined using New York Stock Excha nge data from 1988. Intraday test results indicate that, for actively traded firms trading volume, adverse selection costs, and return volatility are higher in the first half-hour of the day. This eviden ce is inconsistent with the Admati and Pfleiderer (1988) model which predicts that trading costs are low when volume and return volatilit y are high. Interday test results show that, for actively traded firms , trading volume is low and adverse selection costs are high on Monday , which is consistent with the predictions of the Foster and Viswanath an (1990) model. Copyright 1993 by American Finance Association.
This paper decomposes daily close to close returns into trading day and non-trading day returns. We discover that all of the average negative returns from Friday close to Monday close documented in the literature for stock market indexes occurs during the non-trading period from Friday close to Monday open. In addition, average trading day returns (open to close) are identical for all days of the week. January/firm size/turn-of-the-year anomalies are shown to be interrelated with day-of-the-week returns.
Copulae provide investors with tools to model the dependency structure among financial products. The choice of copulae plays an important role in successful copula applications. However, selecting copulae usually relies on general goodness-of-fit (GoF) tests which are independent of the particular financial problem. This paper �rst proposes a pair-copula-GARCH model to construct the dependency structure and simulate the joint returns of five U.S. equites. It then discusses copula selection problem from the perspective of downside risk management with the so-called D-vine structure, which considers the Joe-Clayton copula and the Student t copula as building blocks for the vine pair-copula decomposition. Value at risk, expected shortfall, and Omega function are considered as downside risk measures in this study. As an alternative to the traditional bootstrap approaches, the proposed pair-copula-GARCH model provides simulated asset returns for generating future scenarios of portfolio value. It is found that, although the Student t pair-copula system performs better than the Joe-Clayton system in a GoF test, the latter is able to provide the loss distributions which are more consistent with the empirically examined loss distributions while optimizing the Omega ratio. Furthermore, the economic benefit of using the pair-copula-GARCH model is revealed by comparing the loss distributions from the proposed model and the conventional exponentially weighted moving average model of RiskMetrics in this case.
This paper compares the trading patterns of amateur and professional investors during the days following the weekend. The comparison is based on all the daily transactions of a sample of both amateurs and professionally managed investors in a major brokerage house in Israel from 1994 to1998. We find that weekends influence both amateurs and professional investors; however they affect them in opposite directions. Individuals increase both their buy and sell activities, and their propensity to sell rises more than their propensity to buy. Professionals on the other hand tend to perform fewer buy as well as sell trades after the weekend, but unlike individuals, the drop in their activity is almost the same for buy trades and for sell trades. The results agree with previous hypotheses raised in the literature, but not directly tested, about the effects of the weekend on the predisposition to trade of individuals and institutions in other markets. We also find that returns on the Israeli Stock Market Index are correlated in general with the behavioral patterns exhibited by the investors in our sample. In particular the returns on the days following the weekend are lower than those in other weekdays in a manner consistent with the behavioral patterns we found.
This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. The authors document two potential problems with quote-based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. The authors then propose and test relatively simple procedures for improving trade classifications. Copyright 1991 by American Finance Association.
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
In this paper, the authors document regularities in trading patterns of individual and institutional investors related to the day of the week. They find a relative increase in trading activity by individuals on Mondays. In addition, there is a tendency for individuals to increase the number of sell transactions relative to buy transactions, which might explain at least part of the weekend effect. Copyright 1990 by American Finance Association.
This study uses a longer time period and additional stocks to further investigate the weekend effect. We find consistently negative Monday returns (1) for the S & P Composite as early as 1928, (2) for Exchange‐traded stocks of firms of all sizes, and (3) for actively traded over‐the‐counter (OTC) stocks. The OTC results are based on bid prices and therefore appear to reject specialist‐related explanations. For the 30 individual stocks of the Dow Jones Industrial Index, the average correlation between Friday and Monday returns is positive and the highest of all pairs of successive days. The latter finding is inconsistent with fairly general measurement‐error explanations.
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.