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Are stock returns different over weekends? a jump diffusion analysis of the "weekend effect"

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  • Peter Fortune
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    Abstract

    The distribution of returns on common stocks is, arguably, one of the most widely studied financial market characteristics. The performance of stock prices during breaks in trading has received considerable attention in recent years, especially since the advent of "circuit breakers" designed to create stability when markets are chaotic. This study examines the distribution of daily returns on five popular stock price indices, with a special emphasis on the difference between returns over weekends and returns over adjacent intraweek trading days. The author revisits the "weekend effect" in common stock returns, focusing on two characteristics of differential returns over intraweek trading days and over weekends: the "drift" and the "volatility." He finds that the volatility of stock returns over weekends is much smaller than could be predicted from intraweek volatility. This is true of stock returns over weekends both before and after October 1987. He also finds that the difference between intraweek drift and weekend drift is smaller after October 1987 than before. Indeed, it disappears for large companies, suggesting that the poor performance of common stocks over weekends in the 1980s was a financial anomaly that was mitigated over time, as investors incorporated it into the timing of their transactions. The sharp decrease in volatility over weekends is consistent with the view that active trading actually increases volatility, so that a close in trading will be consistent with a reduction in volatility. However, a weekend is a scheduled event, which might simply reduce the rate of new information flow, while a sudden halt in trading might eliminate all information flow from price discovery, creating an environment that elicits the volatility it is designed to mitigate.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (1999)
    Issue (Month): Sep ()
    Pages: 3-19

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    Handle: RePEc:fip:fedbne:y:1999:i:sep:p:3-19

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    Related research

    Keywords: Stock - Prices ; Stocks;

    References

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    1. Beckers, Stan, 1981. "A Note on Estimating the Parameters of the Diffusion-Jump Model of Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(01), pages 127-140, March.
    2. S. James Press, 1967. "A Compound Events Model for Security Prices," The Journal of Business, University of Chicago Press, vol. 40, pages 317.
    3. Harris, Lawrence, 1986. "A transaction data study of weekly and intradaily patterns in stock returns," Journal of Financial Economics, Elsevier, vol. 16(1), pages 99-117, May.
    4. Peter Fortune, 1998. "Primer on U.S. stock price indices," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 25-40.
    5. Kim, Myung-Jig & Oh, Young-Ho & Brooks, Robert, 1994. "Are Jumps in Stock Returns Diversifiable? Evidence and Implications for Option Pricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 609-631, December.
    6. Abraham, Abraham & Ikenberry, David L., 1994. "The Individual Investor and the Weekend Effect," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(02), pages 263-277, June.
    7. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    8. Johnson, Gordon & Schneeweis, Thomas, 1994. "Jump-Diffusion Processes in the Foreign Exchange Markets and the Release of Macroeconomic News," Computational Economics, Society for Computational Economics, vol. 7(4), pages 309-29.
    9. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
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    Cited by:
    1. Peter Fortune, 2001. "Margin lending and stock market volatility," New England Economic Review, Federal Reserve Bank of Boston, pages 3-25.
    2. Guglielmo Maria Caporale & Luis Gil-Alana & Alex Plastun & Inna Makarenko, 2014. "The Weekend Effect: A Trading Robot and Fractional Integration Analysis," Discussion Papers of DIW Berlin 1386, DIW Berlin, German Institute for Economic Research.
    3. Peter Fortune, 2003. "Margin requirements across equity-related instruments: how level is the playing field?," New England Economic Review, Federal Reserve Bank of Boston, pages 31-50.
    4. Lundgren, Jens & Hellström, Jörgen & Rudholm, Niklas, 2008. "Multinational Electricity Market Integration and Electricity Price Dynamics," HUI Working Papers 16, HUI Research.
    5. Ralph C. Kimball, 2000. "Failures in risk management," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-12.
    6. Anthony Gu, 2004. "The Reversing Weekend Effect: Evidence from the U.S. Equity Markets," Review of Quantitative Finance and Accounting, Springer, vol. 22(1), pages 5-14, January.

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