What it means
In its classic form, the weekend effect describes weak or negative average returns from the close on Friday to the close on Monday. Researchers first noticed it in studies of US share prices, and later found similar patterns in other countries.
It is one of several calendar anomalies, which are patterns linked to dates that seem to conflict with the idea that markets are efficient. There are many suggested reasons.
Companies often release bad news after markets close on Friday, hoping it will attract less attention, and investors react when trading restarts. Others point to investor mood, the way trades settle over the weekend, and the habits of individual investors who tend to sell on Mondays.
If markets were perfectly efficient, any pattern like this would be traded away. Once many traders buy on Monday morning and sell on Friday afternoon, the gap should shrink and then disappear.
Research suggests that the effect has weakened in many markets in recent decades, which fits with that expectation. Even where it exists, using the effect to make money is difficult.
The average difference is small, trading costs can easily exceed it, and the pattern may vanish in a given period. A strategy that looks good on past data can fail once it is used in real time.
For managers and non-specialists, the main lessons are about timing and humility. Avoid reading too much into a single Monday move, and avoid choosing the date of an equity sale based on a weekly pattern alone.
The effect is a useful example of how data patterns can come and go. It also teaches something about evidence.
A pattern found by searching through many possible calendar rules can appear by chance, so researchers test it on fresh data before believing it. Managers should ask the same question of any claim that a certain day or month is lucky.
In practice
Real-world examples.
Example
An academic studies 30 years of daily index returns and finds that the average Monday return is below the average of other weekdays. She publishes the finding as evidence of a calendar anomaly. Later studies on newer data show a much smaller difference.
Example
A retail investor reads about the weekend effect and decides to buy shares on Monday mornings and sell on Fridays. After commissions and spreads, his returns are no better than if he had bought on any other day. He stops following the pattern.
Example
A finance director needs to sell a block of company shares for a funding round. Her adviser says the weekly pattern is too weak to justify waiting for a particular day. They spread the sale over several days to reduce the market impact.
Formula
Calculation
Weekend effect = Average Monday return - Average return on other days
Suppose, in a hypothetical sample, four Mondays produced returns of -0.5%, +0.2%, -0.3% and -0.2%. The average Monday return is (-0.5 + 0.2 - 0.3 - 0.2) / 4 = -0.8 / 4 = -0.2%. If the average return on other days in the same sample is +0.04%, the effect is -0.2 - 0.04 = -0.24 percentage points. On a $500,000 portfolio, that is 500,000 x 0.0024 = $1,200 lower per Monday on average, before trading costs.Case study
Seen in the real world.
Linnet Quantitative Research is an illustrative, fictional firm that tested a simple strategy of buying at Friday's close and selling at Monday's close, in reverse of the weekend effect. Over a twenty-year sample, the strategy showed a small gain per trade.
When the analysts added trading costs of 0.10% each way, the gain disappeared and the strategy turned into a small loss. They also split the data into decades and found that the effect was strong in the first decade and absent in the last.
In this illustrative story the firm decided not to run the strategy. The lesson is that an anomaly in historical data is not the same as a profitable strategy, because costs and changes over time can remove the benefit.
Watch out
Common mistakes.
- Assuming that markets always fall on Mondays, when the effect is an average over many years and not a rule for any given day.
- Ignoring trading costs, which can be larger than the small average difference.
- Treating a historical pattern as a guaranteed future one, when many calendar effects weaken once they become widely known.
Questions
People also ask.
What causes the weekend effect?
Suggested causes include bad news released after Friday's close, investor mood, settlement timing and the selling habits of individual investors, though no single explanation is accepted by everyone.
Does the effect still exist?
Research suggests it has weakened or disappeared in many markets, although some studies still find traces in certain periods and countries.
Is it the same as the January effect?
No, the January effect is a different calendar anomaly in which shares tend to rise in January, while the weekend effect concerns the weak start to the trading week.
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