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Pertanika 11(1), 107-114 (1988)

Stock Returns and the Weekend Effect:the Malaysian Experience


Department of Management StudiesFaculty of Economics and Management

Universiti Pertanian Malaysia43400 Serdang, Selangor, Malaysia


Gelagat pasaran pulangan saham dan kesan mingguan telah dikaji Kajian kami mengesahkanwujudnya kesan mingguan dipasaran saham Malaysia. Secara khususnya, dalam tempoh masa 1975-85,pulangan purata terendah berlaku pada hari Selasa dan kedua-dua pulangan purata pada hari Isnin danSelasa adalah negatif


Market behaviour of stock returns and the weekend effect were investigated. Our study confirmsthe presence of the day of the week effect or Monday effect in the Malaysian Stock Market In particular,over the 1975-1985 periods, the lowest mean return occurred on Tuesday and both Monday and Tuesdayreturns were negative.


One of the most important areas of academicresearch in finance over the past twenty years hasbeen on efficient capital markets. An efficientcapital market is one in which security pricesadjust rapidly to the infusion of new informationand current stock prices fully reflect all availableinformation, An efficient market is also one inwhich prices provide accurate signals for resourceallocation, providing a rendezvous in which firmscan make production-investment decisions andinvestors can choose among securities that repre-sent ownership of a firm's activities.

An initial and very important assumption ofan efficient market is that a large number of profitmaximising participants are concerned with theanalysis and valuation of securities and that theseparticipants operate independently of each other.Another assumption is that new information re-garding securities comes to the market in a randomfashion and independent of one another. A finalassumption is that investors adjust security prices

rapidly to reflect the effect of new information.Although the price adjustment mechanism

may not be perfect, it is normally assumed to beunbiased (sometimes there is an over-adjustment,sometimes an under-adjustment but we don'tknow for sure what it will be). Furthermoresecurity prices that prevail at any time should bean unbiased reflection of all currently availableinformation. The previous price of a securityshould be an unbiased estimate of the currenttrue instrinsic value of the security ai that time,given all the information available. Hence thereturn implicit in the price should reflect the riskinvolved so that expected return is a function of risk.Although a preponderance of evidence supportsthe efficient market hypothesis, several studieshave provided evidence that is inconsistent withthe efficient capital market hypothesis.

Empirical research on capital market docu-menting size, weekend, January and recentlymonthly effects on stock returns represent in-teresting and puzzling empirical evidence on capi-


tal market anomalies. One of the earliest evidenceon the capital market anomalies is the Monday orweekend effect.

Stock markets in developed countries likeUnited States, Japan, Australia, United Kingdomand Canada exhibit a strong tendency of seasonaleffects: Cross (1973), French(1980), Gibbon andHess (1981), Keim and Stambaugh (1984), Jaffeand Westerfield (1985a & 1985b), Harris (1986),Smirlock and Starks (1986), Wong and Ho (1986),Condoyanni et al (1987) and Penman (1987)provide interesting empirical evidence that theaverage return on Friday is abnormaly high whilethe average return on Monday is abnormaly low.Notably the average return for Monday (closeFriday to close Monday) is significantly negative.This so-called day of the week effect or weekendeffect is an empirical regularity for which notheoretical explanation has been found.

This paper intends to extend some empiricalresults found in developed stock markets to a newmarket place. In particular the paper provides anexamination of the day-to-day behaviour of stockmarket returns for Malaysia.

Review of Literature

Evidence of the day of the week effect or weekendeffect on stock prices has generally been obtainedfrom studies of daily close to close returns inbroad market indices. These studies have con-clusively identified systematic returns pattern in particular the average return for Monday (closeFriday to close Monday) to be significantly negative.

French (1980) studied daily return on theStandard and Poor's Composite portfolio of the500 largest firms on the NYSE over the period1953-1977. He concluded that the average re-turns on Monday was significantly negative overalland during each of the five year sub-periods.

Keim and Stambaugh (1984) doubled thelength of period as examined by French (1980).Their results indicated consistently negative Mon-day returns (close Monday to close Friday)throughout the 55-year period. They found nega-tive Monday returns as early as 1928. They alsoreported that in periods with Saturday trading,Friday's return was generally lower than that ofSaturday,

Rogalski (1984) found the presence of week-end effect using Friday's close to Monday's open.

He discovered that all the average negative re-turns from Friday close to Monday close occurredduring the non trading period from Friday close toMonday open. In addition, average trading dayreturns (open to close) were identical for all daysof the week. He also showed that the size-Januaryeffect was interrelated with the weekend effect.

In another paper, Jaffe and Westerfield(1985a) found weekly seasonal effects on theJapanese stock markets. They found that thelowest means return in the Japanese stock marketoccurred on Tuesday and not Monday as in theUnited States. However, their results were consis-tent with Keim and Stambaugh's (1984) sugges-tion that in periods with Saturday trading, Fri-day's return is generally lower than Saturday'sreturn.

In providing international evidence on theweekend effect, Jaffe & Westerfield (1985b)tabulated similar behaviour of stock returnspattern in the United Kingdom, Japanese, Cana-dian, and Australian stock markets. In particularthey found the lowest means return for theJapanese and Australian stock markets ocurringon Tuesday.

Smirlock and Starks (1986) examined day ofthe week effect using hourly data of the DowJones Industrial Average. They confirmed theresults found by Rogalski (1984) which indicatedthat the weekend effect was due to the negativeaverage returns from Friday close to Mondayopen.

Harris (1986) found that for large firms,negative Monday returns accrued between Fridayclose and Monday open; for smaller firms theyaccrued primarily during the Monday's tradingday.

Wong and Ho (1986) examined the SingaporeStock Exchange All Share Index and six sectorialindexes. They found a weekly seasonal patternsimilar to those in U.K., U.S. and Canada.

Condoyanni et al (1987) examined the week-end effect on seven stock exchanges namely, NewYork, Sydney, Toronto, London, Tokyo, Parisand Singapore. They tentatively suggest that theweekend effect which was documented on theseven stock exchanges appear to be the normrather than the exception in a range of capitalmarkets around the world.

Penman (1987) found that firms tend to

108 PERTANIKA VOL. 11 NO. 1, 1988


publish bad news earning reports on Mondays,coincident with the negative Monday effect instock returns.

Suggested Explanation

Previous authors have mentioned settlement proce-dures and measurement errors as plausible reasonsfor such behaviour. Settlement procedures refer todelay of cash payment for stock purchase andcash receipt for selling before stock certificatesexchange hands. For example,according to Lakoni-shok and Levi (1981), since 1968 it has been theestablished practice in the U.S for the settlementon stocks to take place five business days aftertrading. In an ordinary week that does not containany holidays, this means that payment is due onthe same day of the week as the trade, but in thefollowing week. Cheques normally take one busi-ness day to clear from the time they are deliveredto the commercial banks to the time that usablefunds are debited and credited. This clearing delaymeans that in weeks without a holiday, stocks pur-chased on business days other than Friday givesthe buyer eight calender days before losing fundsfor stock purchases. These eight days are the fivebusiness days for settlement, the two weekenddays and the cheque clearing day. However, pay-ment for stock purchased on Friday will notoccur until the second following Monday, tencalendar days after the trade. These ten days arethe five business days for settlement, the twoweekends and the cheque clearing day. Buyersshould therefore be prepared to pay more on aFriday than any other by the amount of the twodays interest. The sellers of stock should also re-quire a higher price for stocks sold on a Fridaybecause of the two extra day delay before beingpaid. Hence the equilibrium expected rate ofreturn on Friday should be higher than on otherdays. As such, the equilibrium expected rate ofreturn on Monday should be lower by two daysof interest than the return expected.

Measurement errors could be caused by up-wardly biased quotes at Friday closing price. Forexample, Keim and Stambaugh (1984) suggest thatFriday's closing price might be affected by random

errors which are generally positive and Monday'sclosing price might be affected by generally nega-tive random errors. They found a higher thanaverage negative correlation between returns onthese two days for U.S data, thus suggesting apossibility of random ty