Day-of-the-week and intraday effects in stock returns

This study examines day-of-the-week effects using hourly values of the Dow Jones Industrial Average. We find that over the 1963–1983 period the weekend effect has sifted from characterizing active trading on Monday to characterizing the non-trading weekend. Over the early part of our sample period negative returns characterize each hour of trading on Monday, while the return from Friday close to Monday open is positive. In the most recent subperiod, Monday average hourly returns after noon are all positive and the weekend effect is due to negative average returns from Friday close to Monday open.     

Stock returns and the weekend effect

This paper examines two alternative models of the process generating stock returns. Under the calendar time hypothesis, the process operates continuously and the expected return for Monday is three times the expected return for other days of the week. Under the trading time hypothesis, returns are generated only during active trading and the expected return is the same for each day of the week. During most of the period studied, from 1953 through 1977, the daily returns to the Standard and Poor's composite portfolio are inconsistent with both models. Although the average return for the other four days of the week was positive, the average for Monday was significantly negative during each of five-year subperiods.     

The Determinants of Conditional Autocorrelation in Stock Returns

We investigate whether return volatility, trading volume, return asymmetry, business cycles, and day‐of‐the‐week are potential determinants of conditional autocorrelation in stock returns. Our primary focus is on the role of feedback trading and the interplay of return volatility. We present empirical evidence using conditional autocorrelation estimates generated from multivariate generalized autoregressive conditional heteroskedasticity (M‐GARCH) models for individual U.S. stock and index data. In addition to return volatility, we find that trading volume and market returns are important in explaining the time‐varying patterns of return autocorrelation.     

ARE PAIRS TRADING PROFITS ROBUST TO TRADING COSTS?

We examine the impact of trading costs on pairs trading profitability in the U.S. equity market, 1963 to 2009. After controlling for commissions, market impact, and short selling fees, pairs trading remains profitable, albeit at much more modest levels. Specifically, we document a risk‐adjusted return of about 30 basis points per month among portfolios of well‐matched pairs that are formed within refined industry groups. Pairs trading exhibits a lower risk and lower return profile than a short‐term reversal strategy that sorts stocks relative to their industry peers. Notably, both these types of contrarian investing are largely unprofitable after 2002.     

ROBUSTNESS OF THE HEADQUARTERS‐CITY EFFECT ON STOCK RETURNS

Recent studies report that U.S. firms headquartered near each other experience positive comovement in their stock returns, a finding suggestive of local biases in equity trading activity. We investigate the robustness of these findings and find that including additional pricing factors in models for monthly stock returns materially reduces the magnitude of the headquarters‐city effect in stock returns. Additionally, we find that an implicit null hypothesis of zero local return comovement is inappropriate as there is positive comovement between a stock's return and returns on portfolios of stocks from nonheadquarters cities, on average. Nevertheless, results benchmarked against estimates based on resampling methods indicate a significant and robust headquarters‐city effect in stock returns.     

Decimals And Liquidity: A Study Of The Nyse

Using a carefully constructed matched sample of control (nondecimal) stocks, we isolate the effects of decimalization for a sample of NYSE‐listed common stocks trading in decimals. We find that the quoted depth as well as the quoted and effective bid‐ask spreads declined significantly following decimalization. Additionally, both the number of trades and trading volume declined significantly. Stock return volatilities display an initial increase but a decline over the longer term, probably as traders become more comfortable in their new milieu.     

Variations in Trading Volume,Return Volatility,and Trading Costs: Evidence on Recent Price Formation Models

Patterns in stock market trading volume, trading costs, and return volatility are examined using New York Stock Exchange data from 1988. Intraday test results indicate that, for actively traded firms trading volume, adverse selection costs, and return volatility are higher in the first half-hour of the day. This evidence is inconsistent with the Admati and Pfleiderer (1988) model which predicts that trading costs are low when volume and return volatility are high. Interday test results show that, for actively traded firms, trading volume is low and adverse selection costs are high on Monday, which is consistent with the predictions of the Foster and Viswanathan (1990) model.     

CONCENTRATED OPENING VOLUME: MARKET CLOSURE OR STRATEGIC TRADING?

The NYSE extended its trading hours on September 30, 1985, by opening at 9:30 a.m. rather than at 10:00 a.m. Whereas the market closure models predict that the extension would result in lower relative volume and return variability at the open, the strategic trading models predict that the opening volume and return variability would remain relatively the same. Evidence around the extension suggests that the relative opening volume and return variability declined initially but increased gradually to their pre‐extension levels. This evidence favors the strategic trading model explanation of the heightened opening volume.     

GOOD NEWS, BAD NEWS, VOLUME, AND THE MONDAY EFFECT

New evidence is presented on the nature of the Monday effect in stock market returns. Using stock returns for the years 1962-1986, the Monday effect is found to be confined to periods of negative market returns. Monday's returns are no different from other weekday returns in periods of positive returns. In addition, trading volume and the Monday effect are related. Monday's volume is lower than the other weekdays. When returns are compared controlling for trading volume, we find that the Monday effect is confined to negative return periods with above normal volume, which represent only two per cent of the sample period.     

Emerging from Bankruptcy with When‐Issued Trading

We examine the set of firms that emerged from Chapter 11 bankruptcy and traded on a when‐issued basis before their official return to the regular way in NASDAQ, Amex, or NYSE. We find that this when‐issued market is liquid and price efficient. The when‐issued closing price is a good indicator of the first closing price in the regular way market. Emerging firms that have when‐issued trading experience lower regular way volatility and smaller relative spreads than those without when‐issued trading. Our probit regressions show that firm size is an important determinant of the adoption of when‐issued trading.     

On the Stability of the Cross‐Section of Expected Stock Returns in the Cross‐Section: Understanding the Curious Role of Share Turnover

In this paper, we shed further light on cross‐sectional predictors of stock return performance. Specifically, we explore whether the cross‐section of expected stock returns is robust within stock groups sorted by past monthly return. We find that the book/market and momentum effects are remarkably robust to sorting on past returns. However, share turnover is negatively related to future returns for stocks with abnormally low stock price performance in the recent past, but postively related to returns for well‐performing stocks. This casts doubt on the use of turnover as a liquidity proxy, but is consistent with turnover being a proxy for momentum trading which pushes prices in the direction of past price movements. Our results are robust to both NYSE/AMEX and Nasdaq stocks, and also robust to stratifying the sample by time period.     

The wandering weekday effect in major stock markets

This paper reports a wandering weekday effect: the pattern of day seasonality in stock market returns is not fixed, as assumed in the Monday or weekend effects, but changes over time. Analysing daily closing prices in eleven major stock markets during 1993–2007, our results show that the wandering weekday is not conditional on average returns in the previous week (the “twist” in the Monday effect). Nor does it diminish through the period of analysis. The results have important implications for market efficiency, and help to reconcile mixed findings in previous studies, including the reported disappearance of the weekday effect in recent years.     

EX‐DIVIDEND DAY PRICE BEHAVIOR OF EXCHANGE‐TRADED FUNDS

We document that for exchange‐traded funds (ETFs), the price falls on average by the dividend amounts on the ex‐dividend day, and there are significantly positive abnormal volumes. This is because trading in ETFs entails lower transaction costs and lower risk than trading in equity closed‐end funds (CEFs) and individual stocks. Similar results are also found for equity CEFs. However, regression analyses indicate that transaction costs and risk are indeed negligible for ETFs but not for equity CEFs and that risk remains important for a sample of stocks matched based on transaction costs. Overall, the results support the short‐term traders hypothesis.     

Intraday trading volume and international spillover effects

The objective of this paper is to explore whether lagged trading activity in one market contributes to the return and volatility process in other markets, using 5-min concurrent data from German and British equity market. Our results lend support to our initial premise that if international investors have access to the same information set as domestic traders, then after observing foreign trading activity, market makers adjust prices to reflect their expectation of the security value, conditional upon all available information, including prior trades. Our findings clearly indicate that intraday trading volume contains predictive power for cross-border return and volatility processes. Moreover, these volume effects are found to be asymmetric in the sense that the impact of positive volume changes upon foreign stock market volatility is greater than is the impact of negative changes.     

The Endogeneity of Trading Volume in Stock and Bond Returns: An Instrumental Variable Approach

This paper investigates the joint determination of trading volume and returns. Our approach follows from the argument that trading activity depends on security returns, thus resulting in a reverse causality from returns to trading activity. Using exogenous instruments for security trading activity, we estimate a system of two‐stage simultaneous equations to better model the return‐volume relationship. Our results confirm that returns and trading volume are determined simultaneously in both stock and corporate bond markets and that conclusions about the direction and significance of causality between volume and returns can be reversed once one corrects for the endogeneity of volume.     

THE EFFECTS OF DECIMALIZATION ON RETURN VOLATILITY COMPONENTS,SERIAL CORRELATION,AND TRADING COSTS

We examine the composition of return volatility, serial correlation, and trading costs before and after decimalization on the New York Stock Exchange. We decompose the variance of price changes into components associated with public news, rounding errors, and market‐making frictions. We find that when stocks move from a fractional to a decimal trading system, the variance components due to market‐making frictions and rounding errors decline significantly, whereas the component due to public news remains unchanged. The serial correlation of price changes weakens substantially after decimalization. The uninformed component of bid‐ask spreads decreases significantly whereas the informed component has no significant change.     

The effect of US holidays on the European markets: when the cat’s away…

This paper presents evidence of the existence of a return effect on European stock markets coinciding with New York Stock Exchange (NYSE) holidays, which is particularly marked after positive closing returns on the NYSE the previous day. The effect is large enough to be exploited by trading index futures. This anomaly cannot be explained by seasonal effects, such as the day of the week effect, the January effect or the pre‐holiday effect, nor is it consistent with behavioural finance models that predict positive correlation between trading volume and returns. However, examination of factors such as information volume or investor mix provides a reasonable explanation.     

Are margin traders informed?

The literature offers contradictory views on the informativeness of margin trading using various measures of information content. Utilising data from a Chinese margin‐trading pilot programme initiated in 2010, this paper investigates whether margin traders are informed by directly examining the return predictability of margin‐trading activity. We find that margin‐trading activities cannot positively predict future stock returns. Moreover, we explore some non‐informational trading strategies used by margin traders, e.g., positive‐feedback strategies and moving‐average trading rules. These results suggest that margin traders are noise traders rather than informed traders, and margin trading conveys no new firm‐specific information.     

Economic value of analyst recommendations in Australia: an application of the Black–Litterman asset allocation model

This study empirically examines the investment value of security analyst recommendations on constituent stocks of the S&P/ASX 50 index. We find that stocks with favourable (unfavourable) recommendations on average outperformed (underperformed) the benchmark index. An investment strategy using the Black–Litterman asset allocation model that incorporates consensus analyst recommendations, in conjunction with daily rebalancing, outperforms the market in terms of return and risk‐adjusted performance measures. The investment strategy involves high levels of trading, and no significant abnormal returns are achieved after transaction costs. Less frequent rebalancing, under most situations, causes a decrease in both performance and turnover. Filtering of dated recommendations causes an increase in turnover, while having mixed effects on investment returns.     

Ex-dividend day trading: Who,how, and why? : Evidence from the Finnish market

This study examines the ex-dividend day trading behavior of all investors in the Finnish stock market. Consistent with dynamic dividend clientele theories, investors with a preference for dividend income buy shares cum-dividend and sell ex-dividend; the reverse is true for investors with the opposite preference. Investors also engage in overnight arbitrage, earning on average a 2% overnight return on their invested capital. Trades at the investor-level reveal that idiosyncratic risk is an important determinant in the choice of stock for short-term ex-day trading. Furthermore, transaction costs and dividend yield jointly determine whether the volume of short-term trading activity is nonzero.