The well-known Monday effect in stock markets (lower/negative returns on Mondays) may have disappeared during the last 15-20 years, but another anomaly still exists.
University of Otago research has found that an aspect of the Monday anomaly persists to date and is pervasive across the world stock markets – Monday returns on the stock market are likely to reverse on subsequent days.
US researchers first noted this anomalous pattern in 1993. Dr Numan Ülkü, senior lecturer in Accountancy and Finance, has now documented, in a recent study published in Quantitative Finance (2015), that this effect surprisingly persists.
He has shown if the stock market goes down on Monday, it is likely to rebound later in the week. Conversely, if the stock market rises on Mondays, it is likely to drop over the rest of the week.
He also showed that it could be possible for investors to take advantage of this anomaly through a simple trading rule, which produces positive profits after adjusting for transactions costs. That means traders can benefit from betting against the market movement on Monday during the rest of the week, although Ülkü warned this does not mean that this strategy will make positive profits every week.
Now, he is extending this research to investigate the causes behind this anomaly, together with his master’s student Madeline Rogers. They believe that one potential cause could be that institutional investors trade less on Mondays. Ülkü and Rogers are now working on documenting evidence for their hypothesised explanation.