In Finance, what is the Weekend Effect?

The weekend effect is a pattern in stock performance which has been observed since the 1980s. People who follow the stock markets have noted that securities tend to perform most highly on Fridays, and to have relatively weak returns on Mondays. There has been a great deal of speculation about the mechanisms behind the weekend effect, and a number of papers have been written to put forth various theories and explanations.

One theory is that companies often opt to release bad news which could affect stock value on Friday afternoons so that it will break during the weekend. Breaking news on the weekends tends to attract less attention, and companies hope that a major breaking item will obscure their bad news by Monday morning, ensuring that it gets shuffled to the back page of the newspaper. This strategy may be effective for minimizing awareness of bad news, but it can contribute to the weekend effect, because savvy traders keep a close eye on the news even during the weekends, and they will react quickly to bad news when the trading floor opens again on Mondays.

Other researchers have attributed the weekend effect to psychology. On Fridays, traders are riding high and they may feel confident, driving up the volume of trading and keeping returns high. By Monday morning, they've sunk back into a slump, keeping trading sluggish and optimism low. A "case of the Mondays" is certainly not a psychological issue restricted to stock traders.

In the United States, the weekend effect may be linked with the fact that the United States Treasury holds its regular auctions on Mondays. These can throw off the volume of trading. There have also been suggestions that the effect may be caused by short selling, or by after hours trading activities which have a chance to snowball over the weekend.

Whatever the cause, the weekend effect is a recognized phenomenon and it has been closely studied. It does not necessarily happen every week, and in fact weeks or months can go by without a noticeable weekend effect, but it is notable enough to come up in discussions about how stock markets perform and the psychology of the people who work in the industry. Charts which show the weekend effect in action over the years can be found on some websites, and in the appendices of scholarly papers which have attempted to puzzle out the phenomenon.