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Calendar-based clustering of weekly extremes: Empirical failure of stochastic models

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  • Lee, Im Hyeon

Abstract

This study uncovers a significant deviation from randomness in the occurrence of weekly highs and lows in financial markets, a phenomenon we term the clustering of weekly extremes. Unlike the well-known day-of-the-week effect, which focuses on differences in mean returns and volatility, this clustering represents the concentration of highs and lows that cannot be explained by random variation. To address this gap, this study introduces a day-dependent Markov-switching GARCH model that incorporates weekday-specific transition probabilities. The proposed model more effectively captures the clustering of weekly extremes than conventional models and provides a novel analytical framework for more accurately understanding calendar-driven market dynamics.

Suggested Citation

  • Lee, Im Hyeon, 2025. "Calendar-based clustering of weekly extremes: Empirical failure of stochastic models," Finance Research Letters, Elsevier, vol. 85(PB).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pb:s1544612325012504
    DOI: 10.1016/j.frl.2025.107992
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    References listed on IDEAS

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    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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