Day of the week anomaly (Monday Effect) – How to do it?
Day of the week anomaly or more known as Monday Effect is one of calendar anomalies in financial market. It states that the stock market returns on Monday is significantly different from other day. This anomaly is proposed by Kenneth French in 1980, and his research paper was published in Journal of Financial Economics. The appearance of Monday Effect is an evidence of market inefficiency. Yet, in French (1980) paper, he suggested an arbitrage profit or mispricing profit from this anomaly. He further surmises “Although an active trading strategy based on the negative expected returns would not have been profitable because of transactions costs, investors could have Increased their expected returns by altering the timing of trades which would have been made anyway – delaying purchases for Thursday Friday until sales scheduled Monday on preceding Friday”
What theory to be used?
Monday effect is an evidence of market inefficiency. Hence, it has to start from Market Efficiency theory of Fama (1965). In other words, research in Monday Effect argues Market Efficiency theory instead of supporting it. There is also closed-market hypothesis which is part of Market efficiency theory. It states that the negative returns occur only on Monday due to the closed-market effect, where the expected return will be lower following holidays as well as weekends. This closed-market effect is been used as underpinning theory for other calendar anomalies such as holiday effect, September effect, Christmas effect, intra-day trading effect, and other anomalies. Other theories that can be used are mispricing and sentiment.
How to do it?
Day of the week anomaly or Monday Effect model follows the dummy regression model. Most research uses or modifies French (1980) model for it. The first step is the calculation of return. It has to be daily return. The return is the dependent variable. Next step is to have dummy variable for each day. If that day is Monday, give “1”, otherwise 0. If that day is Tuesday, give “1”, otherwise 0. Do the same for the other days. See picture below:
Be careful with Saturday or Sunday (because there is no trading during that day). So, you have to exclude it.
Then run the data using the following equation:
Where the intercept/constant represents the Monday effect. Meanwhile, the beta coefficients from Tuesday to Friday represent the difference between expected return for Monday and the expected return for each day of the week. The negative sign of constant coefficient is the indication for Monday Effect, and it has to be significant at 5% level. Kindly note that other research papers in Monday effect still put Monday on the model, and eliminate the constant to avoid the Dummy Trap issue
Further research
You may use Monday effect model test whether certain events are occurred in certain day, and the returns or risks f that occasion are significantly different from other days. For example, you can test Monday effect of temperature meaning to say that Monday returns are significantly from other days due to Monday temperature. You can test also Monday effect on market integration. For example, you want to reveal whether market is more integrated in Monday compared to other days.
Anomali Monday Effect / Day of the Week – Bagaimana melakukan risetnya?
Monday Effect adalah salah satu anomali kalender di pasar keuangan. Anomali ini memiliki dua bentuk. Bentuk pertama adalah bahwa tingkat pengembalian saham (returns) pada hari Senin secara signifikan berbeda dari hari lainnya.
Anomali ini diusulkan oleh Kenneth French pada tahun 1980, dan makalah penelitiannya diterbitkan dalam Journal of Financial Economics. Munculnya Efek Senin (Monday Effect) ini adalah bukti ketidakefisienan pasar. Namun, French (1980), menyarankan investor mungkin saja mendapatkan laba arbitrase atau laba mispricing dari anomali ini. Dia lebih lanjut menduga “Meskipun strategi perdagangan aktif berdasarkan pada pengembalian yang diharapkan negatif tidak akan menguntungkan karena biaya transaksi, investor bisa meningkatkan pengembalian yang diharapkan dengan mengubah waktu perdagangan yang seharusnya dilakukan – menunda pembelian untuk Kamis Jumat. hingga penjualan dijadwalkan hari Senin pada hari Jumat sebelumnya “
Teori apa yang harus digunakan?
Monday Effect adalah bukti ketidakefisienan pasar. Oleh karena itu, penelitian Monday effect harus dimulai dari teori Efisiensi Pasar dari Fama (1970). Dengan kata lain, penelitian Monday Effect ini bukan pendukung teori Efisiensi Pasar. Ada juga hipotesis pasar tutup (Closed-Market hypothesis) yang merupakan bagian dari teori efisiensi Pasar. Teori ini menyatakan bahwa pengembalian negatif hanya terjadi pada hari Senin karena efek pasar yang tutup hari sebelumnya, di mana pengembalian yang diharapkan akan lebih rendah setelah hari libur serta akhir pekan. Efek pasar tertutup ini telah digunakan sebagai teori pendukung untuk anomali kalender lainnya seperti holiday effect, September effect, Christmas effect, intra-day trading effect, dan anomali lainnya. Teori lain yang dapat digunakan adalah mispricing dan sentimen. Bisa juga menggunakan teori perilaku seperti Brahmana et al (2012)
Bagaimana cara melakukannya?
Model estimasi Monday Effect mengikuti model regresi dummy. Sebagian besar penelitian menggunakan atau memodifikasi model French (1980) untuk itu. Langkah pertama adalah perhitungan pengembalian (returns). Returns harus dihitung untuk setiap hari, dan ia adalah variabel dependen (terikat). Langkah selanjutnya adalah memiliki variabel dummy untuk setiap hari. Jika hari itu adalah hari Senin, berikan “1”, jika tidak 0. Jika hari itu adalah hari Selasa, berikan “1”, sebaliknya 0. Lakukan hal yang sama untuk hari lainnya. Lihat gambar di bawah ini:
Hati-hati dengan hari Sabtu atau Minggu (karena tidak ada perdagangan selama hari itu). Jadi, Anda harus mengecualikannya.
Kemudian jalankan data menggunakan persamaan berikut:
Di mana intercept / constant mewakili Monday Effect. Sementara itu, koefisien beta dari Selasa hingga Jumat mewakili perbedaan antara returns untuk hari Senin dan returns untuk setiap hari lainnya dalam seminggu. Tanda negatif dari koefisien konstan adalah indikasi untuk Monday Effect, dan konstant itu harus signifikan pada tingkat 5%. Harap dicatat bahwa makalah penelitian lain dalam efek Senin masih meletakan Senin pada model (tidak dibuang seperti model di atas), dan menghilangkan konstanta untuk menghindari masalah Dummy Trap
Penelitian lebih lanjut
Anda dapat menggunakan tes model Monday effect untuk penelitian lainnya. Misalnya, Anda dapat menguji Monday Effect dengan cara mengkaitkannya dengan cuaca. Anda dapat menguji juga Monday Effect pada integrasi pasar. Misalnya, Anda ingin mengungkapkan apakah pasar lebih terintegrasi pada hari Senin dibandingkan dengan hari lainnya
You may refer to these literatures for further research:
Brahmana, R. K., Hooy, C. W., & Ahmad, Z. (2012). Weather, investor irrationality and day-of-the-week anomaly: case of Indonesia. Journal of Bioeconomics, 14(2), 129-146. (LINK: https://link.springer.com/article/10.1007/s10818-011-9107-z )
Brahmana, R., Hooy, C. W., & Ahmad, Z. (2012). THE ROLE OF HERD BEHAVIOUR IN DETERMINING THE INVESTOR’S MONDAY IRRATIONALITY. Asian Academy of Management Journal of Accounting & Finance, 8(2). (LINK: https://www.researchgate.net/profile/Rayenda_Brahmana/publication/286807057_The_role_of_herd_behaviour_in_determining_the_investor%27s_Monday_irrationality/links/571dc99a08aee3ddc56ad01c/The-role-of-herd-behaviour-in-determining-the-investors-Monday-irrationality.pdf )
Brahmana, R., Hooy, C. W., & Ahmad, Z. (2012). Bad News Announcement on Investor’s Monday Irrationality: Insight from Malaysia. Journal of Indonesian Economy and Business, 27(2), 210-223. (LINK: https://journal.ugm.ac.id/jieb/article/view/6247 )
Brahmana, R. K., Hooy, C. W., & Ahmad, Z. (2015). Moon Phase as the Cause of Monday Irrationality&58; Case of Asean Day of the Week Anomaly. The International Journal of Economic Behavior, 4(1), 51-65. (LINK: http://www.ingentaconnect.com/content/doaj/20695756/2014/00000004/00000001/art00005 )
Brahmana, R., & Asmar, M. (2011). Does Integration Occur on a Certain Day? The Case of the Lithuanian Stock Market. South East European Journal of Economics and Business, 6(2), 13-21. (LINK: https://content.sciendo.com/view/journals/jeb/6/2/article-p13.xml )
Reference:
Khresna Brahmana, R., Hooy, C. W., & Ahmad, Z. (2012). Psychological factors on irrational financial decision making: Case of day-of-the week anomaly. Humanomics, 28(4), 236-257. (LINK: https://www.emeraldinsight.com/doi/full/10.1108/08288661211277317 )
French, K. R. (1980). Stock returns and the weekend effect. Journal of financial economics, 8(1), 55-69. (LINK: https://s3.amazonaws.com/academia.edu.documents/32640911/324194_2_Stock-Returns-and-weekend-effect.pdf?AWSAccessKeyId=AKIAIWOWYYGZ2Y53UL3A&Expires=1526721710&Signature=6AY83yJiO4M7fujhkaJYjA0q5QM%3D&response-content-disposition=inline%3B%20filename%3D324194_2_Stock-Returns-and-weekend-effec.pdf )
Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The journal of Finance, 25(2), 383-417. (LINK: http://www.jstor.org/stable/2325486?seq=1#page_scan_tab_contents )
Rayenda Khresna Brahmana 