All share investors like to think they behave rationally.
But humans are not rational beings, and this is reflected in a phenomenon called the Weekend Effect.
This is the tendency for the market to produce higher returns on a Friday than Mondays, which tend to show lower or negative returns.
An analyst named Frank Cross first described the pattern in 1973 in an article in the Financial Analysts Journal.
There are several theories trying to explain why this would happen.
The simplest is that people, in general, are in a better mood on a Friday than a Monday.
“We find that investors’ decision-making process in the stock market is affected by mood swing across weekdays,” RMIT senior lecturer Angel Zhong.
“Psychological studies show that people are affected by mood when making decisions and tend to respond to stimuli more positively when in a good mood and vice versa.”
A related theory is that public companies “bury” bad news on a Friday afternoon after the markets close, so there is maximum time for investors to forget about it.
‘Speculative’ shares especially love Fridays
According to Zhong, the effect is more obvious for “speculative” shares as they’re more exposed to emotional buyers and sellers.
“The impact of mood on decision making is pronounced when facing uncertainty. In the context of stock markets, making a decision with highly uncertain information corresponds to the valuation of speculative stocks, which are young, growing and highly volatile.”
She said buy-now-pay-later shares like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are classic examples in 2020.
“Mood improves gradually from Monday to Friday ranging from the Monday blues to ‘thank god it’s Friday’,” Zhong said.
“That means, investors are more pessimistic on Monday, thus pushing the prices of speculative stocks down. Investors are happier on Friday, hence viewing speculative stocks more favourably.”
Tuesday Blues
Zhong specialises in behavioural biases in retail and institutional share investors.
The Weekend Effect theory originated out of the US, but Zhong has noticed a uniquely Australian phenomenon: the Tuesday Blues.
This is because Australian markets often follow the overnight behaviour of US markets.
US shares experience their Monday depression on Tuesday morning Australian time. Then the ASX follows that lead.
“That means on average, buy-now-pay-later stocks such as Afterpay and Zip tend to underperform on Monday and Tuesday,” said Zhong.
“On Friday, when investors’ mood improves, speculative stocks generate higher returns.”
