The Day-Of-The-week Effect in Stock Returns

The Day-of-the-Week Effect in Stock Returns: Further Evidence from Eastern European
Emerging Markets
Author(s): Richard A. Ajayi, Seyed Mehdian and Mark J. Perry
Source: Emerging Markets Finance & Trade, Vol. 40, No. 4 (Jul. - Aug., 2004), pp. 53-62
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Emerging
Finance
Markets
and Trade,
vol.
40, no. 4,
July-August 2004, pp. 53-62.

? 2004 M.E. Sharpe, Inc.All rightsreserved.
ISSN 1540-496X/2004 $9.50 + 0.00.
Richard A. Ajayi,
Mark
J. Perry
and
Seyed Mehdian,
The Day-of-the-Week Effect in

Stock Returns
Further Evidence
Emerging Markets
from Eastern European
literature on the day-of-the-week

Existing
on the United States and other advanced
economies
Abstract:
stock return anomaly focuses mainly

little or no attention to the emerg
with
In an attempt to address
this gap in the
including those of Eastern Europe.
an
this
conducts
stock re
literature,
paper
empirical
investigation
of the day-ofthe-week
turn anomaly
in
Eastern
market
stock
indices
eleven
using major
European
emerging mar
ing markets,
returns in six of the EEEMs

The empirical
results indicate negative Monday
returns in the remaining five. Two of the six negative Monday
returns
and positive Monday
returns are statistically
These
and only one of thefive positive Monday
significant.
findings
to support the presence
in
of any significant daily patterns
provide no consistent evidence
kets (EEEM).
the stock market
returns of the EEEM.
Key words: Eastern

European
markets.
international financial
stock markets,
efficient markets
hypothesis,
event
studies,
The efficientmarket hypothesis (EMH) posits that stocks are priced efficiently to
reflectall available informationabout the intrinsicvalue of the security.An efficient
market is one where all unexploited profitopportunities are eliminated by arbitrage.
A considerable volume of literaturehas, however, documented several persistent
Richard
of Business,
A. Ajayi
is an associate
(rajayi@bus.ucf.edu)
professor of finance in the College
of Finance, University of Central Florida, Orlando;
Seyed Mehdian
is a professor of finance in the School of Management,
of
University
Department
(seyed@umflint.edu)
and Mark
J. Perry (mjperry@umich.edu)
Michigan-Flint;
in the Department
finance and economics
of Economics,
is an associate
University
professor
of Michigan-Flint.
of
53

54 EMERGINGMARKETS FINANCEAND TRADE

and potentiallyexploitable day-of-the-weekpatterns in stock returnsand theseanoma
lies present legitimate challenges to theEMH. A notable anomaly is theMonday
effect indaily stock returns,which suggests thatstock returnsare significantly lower
or negative onMondays relative to other days of theweek. This Monday effecthas
been extensively examined not only inU.S. asset markets but in internationalmar
kets as well. (See, for example, French 1980; Gibbons and Hess 1981; Kamara
1997; Lakonishok and Levi 1982; Lakonishok and Smidt 1988;Mehdian and Perry
2001; Smirlock and Starks 1986; andWang et al. 1997 forU.S. financial markets
and Dubois and Louvet 1996; Gultekin and Gultekin 1983; Kim 1989; Jaffeet al.
1989; and Solnik and Bousquet 1990 for international stockmarkets.)
Whereas day-of-the-week anomalies in theUnited States and other advanced
equity markets have been investigated extensively, the emerging markets have re
ceived much less attention. In particular, theEastern European emerging markets

(EEEM) have not yet received any attention. For the emerging markets, it is intui
tive to reason that the presence of information asymmetry, limited disclosure re
quirements, theparticipation ofmany unsophisticated investors, and a prevalence
of small cap stocks should breed anomalies in equity returns.Furthermore, it is
interesting to speculate whether seasonal anomalies are a "natural stage" in the
evolution of financial markets whereby themore advanced economies have al

ready passed through on theway tomarket efficiency,while the emerging stock
markets are just entering such a stage.
The objective of thispaper is to examine the day-of-the-week stock returnpat
terns in eleven EEEMs to provide empirical evidence on theirdegree of market
efficiency.To this end, we use the daily closing values of themajor stock indices
startingfrom the inception date of the emergence or reemergence of stockmarkets

in each of these countries. The results indicate negative Monday returns in six of
the eleven stockmarkets and positive Monday returns in the remaining five. Two
of the six negative Monday returnsand only one of the positive Monday returns
are statistically significant. In addition, we conduct statistical tests of the differ
ences between (1) themean returnonMonday versus themean returnduring the
rest of theweek and (2) the variance of Monday returns versus the variance of
returnsduring the restof theweek. Our results show that thedifference inmeans is
statistically significant in only one country and thedifference invariance is statis
tically significant in four of the eleven markets. These findings do not provide any
consistent evidence to support thepresence of any significant daily patterns in the
stockmarket returnsof theEEEM. The results are, for themost part, at variance
with any assumption thatnewly emerging markets are structurallypredisposed to
market inefficiencyor daily returnanomalies.
An Overview
of Eastern European
Emerging Markets
The collapse of communism and the fall of theBerlin Wall paved theway for the
spread of themarket economy intoEastern European countries. The emergence of

JULY-AUGUST2004 55
market economies also necessitated the privatization of previously state-owned
companies. Expanded private sector controls over economic activities and atten
dant needs to transformold, inefficient, centrally planned economic infrastruc
tures intensified thedemand for savings and capital formation.As a result of these
developments, theneed forwell-organized stock exchanges was crucial inEastern
Europe. This study focuses on eleven of the new stock exchanges thatblazed the
trail for freemarket enterprise inEastern Europe: Croatia, Czech Republic, Esto
nia, Hungary, Latvia, Lithuania, Poland, Romania, Russia, Slovakia, and Slovenia.
A common denominator of these emerging stock exchanges is the establish
ment of policymaking authorities, or boards of directors and registered brokers.
Trading on these exchanges is usually based on orders transmittedby registered
brokers and the typical settlement day is T+ 4, where Tis the transaction day.
Over thepast decade, many of the eleven EEEMs have undergone major trans
formations, including deregulation, the opening of exchange membership to for

eign-owned intermediaries, and electronically executed trading. For instance, in
many of these stock exchanges, the number of tradinghours has been increased to
promote access, market-making/block-trading has been introduced to increase li
quidity, order handling and execution systems have been refined to increase effi
ciency, and information systems have been improved to increase transparency.
Many of the eleven EEEMs are associate members of theFederation of Euro
pean Securities Exchange (FESE) and theBaltic Stock Exchange (BSE). Each of
the eleven exchanges has at least one major market index that reflects general
price movements of securities over time and a well-defined methodology for com
puting the index. For the shares of individual companies to be included in the
market index, theymust satisfy several standard requirements setby each exchange
authority.
Data
and Methodology
This study uses the daily closing values of eleven Eastern European emerging
stockmarket indices from the inception of each market's major index to Septem
ber 6, 2002 (see Table 1). The daily stock returns for theEEEM indices are com
puted as follows:
**=log(/a //*-,)*100, (1)

where Rit is thedaily percentage returnof stock index i on day /,and Iitand 4_, are
closing values on day t and t 1 for the same index. Summary statistics of daily
returns for the indices of the eleven EEEMs are reported inTable 1.
Classical time series analysis requires the data being used to be stationary.To
assess the stationarityof daily stockmarket returnsof theEEEM, we perform aug
mented Dickey-Fuller unit root testson each series. The results,which are not re
ported here, show thatthe stock price indices are stationary in theirfirstdifferences.

-9.698420
-9.752299
-7.077220
return -8.853713
-23.87675
-11.61306
-15.01228
-17.49529
-13.78466
-19.04165
-67.47000
Minimum
5.819986
88.4986012.45158
Maximum
return
10.10894
11.62356
16.80181
18.93300
22.46965
4.535868
22.98819
12.68935
of
returns
Standard
2.0102472.266844
deviation 1.863217
0.849724
1.260999
5.462959
1.998264
1.7936711.375175
2.479686
2.112177
return 0.050509
Mean
0.016722
0.017409
0.135761
-0.040553
-0.049243
-0.051256
0.079164
0.007709
0.041970
-0.030060
Summary
Statistics
on
Daily
Returns
Eastern
ofEuropean
Emerging
Markets
1994
1,1994
3,
3,
2,
20,
23,1997
1997
4,
September
17,
January
1995
observations)
1995
1995
1995
1999
20,
July
1998
2,
June
February
date
July
1995
4,
of
Starting
(1,889) (1,781) (1,841)
(1,558) (1,943)_
September
(729)September
(1,048)
(1,172) (1,837)
(1,814)
January
January
January
(number
(1,382)
Czech
Republic
Countries
1
Table
Croatia
Hungary
Lithuania
Estonia
Latvia
Poland
Romania
Russia

Slovakia
Slovenia
JULY-AUGUST2004 57
These findings of the stationarityof daily stock returnsare consistent with results
obtained for themajor stockmarket indices of other countries (see, for example,
Bachman et al. 1996). To examine whether any day-of-the-week effects exist in the
EEEM, we employ the following model
=
Rit auDi + <*2
A + ?3
A
+ a4A
+ <*5
A + e, >
(2)
where Rit is the daily returnof stock index i as defined earlier, and Dx throughD5
are daily dummy variables. If /is a Monday, thenD{ = 1 and Dx = 0 for all other
= 1 and
= 0 for all theother
days, if r is a Tuesday D2
D2
days, and so forth.The as
are parameters to be estimated using ordinary least squares (OLS), and et is a

random error term. If a given stock index exhibits a traditionalMonday effect,
then (1) the estimated coefficient ax is expected to be negative and statistically
significant and (2)Monday returns should also be significantly lower than returns
for the rest of theweek.
Empirical Results
Model (2) is estimated for the indices of the eleven EEEMs using OLS, and the
estimated coefficients along with their /-values are reported inTable 2. Although
not reported here, Chow break-point tests of structural stability for the indices
(using themidpoint foreach index) indicate that theestimated parameters reported

inTable 2 are stable over the sample period for each index. Table 2 shows that
Monday returnsare negative for the stockmarkets of theCzech Republic, Estonia,
Latvia, Lithuania, Romania, and Slovakia. However, Monday returns are signifi
cantly negative only in the case of Lithuania (at the 5 percent level) and Estonia (at
the 10 percent level). For the rest of the six countries included in the sample,
returnsonMonday are positive but significantlypositive only in the case of Russia
(at the 5 percent level). A close examination of Table 2 indicates that, in general,
there are no other statistically significant day-of-the-week effects in the stock re
turnsof theEEEM except in the cases of Slovenia, which has a
negative Tuesday
effect and positive Thursday and Friday effects, and Lithuania, which has signifi
cantly negative Tuesday returns.

For anyMonday effect to be a true stockmarket anomaly,Monday returnsmust
not only be low or negative but theymust also be significantly different from the
returnsduring the rest of theweek. Therefore, to furtherexamine thenature of the
day-of-week effects in the EEEM, we testwhether Monday returns are signifi
cantly differentfrom returnsduring the rest of theweek by performing a series of
difference-of-means tests based on the null hypothesis thatMonday returns are
equal to themean returns from Tuesday to Friday. The results of these tests are
reported inTable 3.As the /-values suggest,Monday returnsare significantly lower
than returnsduring the restof theweek only in thecase of Estonia (at the 1percent
level). Therefore, the negative Monday effect inLithuania and the positive Mon
day effect inRussia previously reportedwould not qualify as stockmarket irregu

58 EMERGINGMARKETSFINANCEAND TRADE
Table 2
Results
Regression
Wednesday
a.
Monday
?1
Tuesday
a0
0.0272
-0.0858
-0.0251
0.1732
-0.5521
-0.1655
Thursday
Friday
Croatia
Coefficient
f-statistic
Czech Republic
Coefficient
^-statistic
0.1403
0.9119
0.1952
1.2649
-0.0587
0.0367
-0.0894
-0.0370
-0.0015
-0.8904
0.5634
-1.3881
-0.5750
-0.0239
Estonia
Coefficient
f-statistic
-0.5570
-0.1398
0.2065
0.1366
0.3780
-1.9034*
-0.4838
0.7187
0.4763
1.3010
Hungary
Coefficient
0.1363
0.0246
0.0826
0.0007
1.2805
0.2346
0.7963
0.0067
f-statistic
0.1532
1.4652
Latvia
Coefficient
f-statistic
-0.0275
-0.1509
-0.0454
0.0092
-0.0322
-0.1980
-1.1052
-0.3353
0.0685
-0.2362
-0.1271
-0.1686
-0.0414
0.0528
-2.1233*
-2.8716*
-0.7148
0.9133
0.0203
0.3499
0.1516
Lithuania
Coefficient
f-statistic
Poland
Coefficient
f-statistic
-0.0879
-0.0896
0.0151
0.0940
-0.7818
-0.8119
0.1384
0.8455
1.3619
Romania
Coefficient
f-statistic
-0.0265
-0.0406
-0.0075
-0.0290
-0.1997
-0.3090
-0.0583
-0.2256
0.1873
1.4455
Russia
Coefficient
0.2631
^-statistic
1.9902*
0.1704
1.3053
0.0191
0.1486
0.1659
1.3024
0.0672
0.5250
Slovakia
Coefficient
f-statistic
-0.1276
-0.1243
-0.1082
0.0599
0.0977
-1.2366
-1.2282
-1.0781
0.5956
0.9532
0.1207
0.1839
Slovenia
Coefficient
f-statistic
Notes:
cance
***
0.0052
-0.1151
0.0098
0.0742
-1.6458
0.1417
indicates
at the 5 percent
statistical
level, and
significance
*
indicates
1.7458*
2.6599*
at the 1 percent level, ** indicates signifi

at the 10 percent level.
significance

5.6460*** 1.5316***
1.8069***
1.1339 1.0338
0.9583 1.1018
F-statistic
1.0384
1.5963***
Variance
1.6038
15.6246
ROW 3.4507
1.2223 1.4308
4.1412
6.1088
0.6551
4.3481
1.9830
2.9698
3.9645
4.6139
1.5369
4.9306
3.3882
6.3157
1.0034
88.2134 7.3653
Variance
Monday
3.5831
-0.16-0.49
f-statistic
4.3681
0.30
0.46
-4.58***
3.5831
4.2494
-1.16
-0.30
-0.90
1.24
-0.59
0.1449
Mean
-0.0232
0.0654
-0.0544
ROW 0.0561
-0.44
0.1056
-0.0196
0.0279
0.0509
0.0420
-0.0333
Monday0.0272
0.1363
Mean
-0.0587
-0.5571
-0.0276
Difference-of-Means
Tests
and
Difference-of-Variances
Tests
for
Mondays
Versus
the
Rest
of
the
Week
(ROW)
-0.0266
0.2632 0.0052
-0.0879
-0.1272
-0.1276
588
848
946
1,116 1,461 1,485
ROW
of observations
1,523
1,433
1,256
1,484
1,564
Number
Number
of observations
Monday141 366 348 357 266 200 353 226 352 302 379
indicates
percent
significance
statistical
the
***
at
1
level.
Czech
Republic
Table
3
Country
HungaryLithuaniaRomania
Estonia Latvia
Slovakia
Slovenia
Poland
Croatia
Russia

60 EMERGINGMARKETS FINANCEAND TRADE

Table 4
Intra-MonthAnalysis of the Monday Effect in Eastern European
Markets
First
Last
two
three
weeks
weeks
Country
Emerging
Difference in
the twoperiods
(t-value)
Estonia
0.0592
Mean
Standard
deviation
-0.0822
0.4900
6.4564
4.8041
Lithuania
-0.0067
-0.0790
Mean
Standard
0.8678
deviation
-1.3600
0.8194
Russia
Mean
0.2500
Standard deviation
2.6585
Note:
***
indicates
statistical
significance
-0.0348
at the 1 percent
2.5100***
2.1763
level.
larities because thoseMonday returnsare not significantly different from returns

during the rest of theweek.
Further examination of thefigures presented inTable 3 indicates that the vola
tilityofMonday returns,measured by thevariance of returns,is significantlyhigher
onMonday relative to the restof theweek in the case of Estonia, Latvia, Lithuania,
and Slovenia. Notice thatforEstonia, while themean returnduring the rest of the
week is significantly greater than themean return on Mondays, the volatility of

returns for the rest of theweek is lower than the volatility ofMonday returns.This
result is inconsistentwith the risk and return trade-off,and implies the possibility
of equities, in general, being priced inefficientlyin theEstonian stockmarket.
Intra-monthanalysis of theMonday effectwas performed for the three indices
that exhibit either a statistically significant positive Monday effect (Russia) or a
statistically significant negative Monday effect (Lithuania and Estonia). This in

tra-monthanalysis is based on a procedure set forthbyWang et al. (1997) to inves
tigatewhether theMonday effect is caused by returns on particularMondays of
themonth. This procedure calls for a difference-of-means test to examine whether
mean returns in the first threeMondays of themonth are statistically different
frommean returns in the last twoMondays of themonth. Table 4 displays the
results of this analysis. As can be seen, forEstonia and Lithuania that exhibit a
traditionalMonday effect (negativeMonday returns), thedifferences between mean
returns in thefirst threeMondays of themonth and themean returns in the last two
Mondays of themonth are not statistically significant.This finding implies that the

JULY-AUGUST2004 61
significant negative Monday returns observed in these twomarkets cannot be at
tributed to any particularMonday(s) of themonth.
In the case of Russia, we note that themean returnforMondays during thefirst
threeweeks of themonth is significantly higher (at the 1 percent level) than the
mean return forMondays during the last two weeks of themonth. This finding
suggests that the positive Monday effect observed inRussia is driven byMonday
returnsduring thefirst threeweeks of themonth. In a previous study byMehdian
and Perry (2001), a significantly positive Monday effect was also found to be
explained by Monday returns in the first threeweeks of themonth for theU.S.
equity markets during the 1987-98 period.
The empirical results displayed inTables 2-4 provide no consistent or conclu
sive evidence to suggest thepresence of anyMonday stock returnanomalies in the
eleven equity markets of the EEEM. These findings are contrary to our initial
speculation thatemerging stockmarkets might be predisposed to significantmar
ket inefficiencies thatwould generate day-of-the-week returnanomalies. One im

portant implication of our investigation is thatno trading rule can be exploited to
generate abnormal returns in these stockmarkets based on a predictable pattern of
Monday
returns.
Summary and Conclusions

The day-of-the-week anomaly in theUnited States and other advanced stockmar
kets has been the subject of an intense and voluminous academic inquiry.The
emerging economies have received only limited attention in this regard and the
in particular have received no attention. This paper presents the first in
EEEMs
vestigation intoday-of-the-week stock returnanomalies in eleven EEEMs.
The empirical results show negativeMonday stock returns in six of theEEEMs
during the period from roughly themid-1990s through 2002, but these negative
returnsare significant in only two of themarkets (Estonia and Lithuania). In addi
tion, positive Monday returns are observed in the remaining five markets but are
significantly positive in only one of the countries (Russia). Furthermore, differ
ence-of-means tests indicate thatMonday returns are significantly lower than the
rest of theweek only in the case of Estonia. Difference-of-variance tests show that
the volatility of themarket onMondays is significantly higher than the volatility
during the rest of theweek in four of theEEEMs.
An intra-monthanalysis of the significantly negative Monday returnsobserved
in Lithuania and Estonia indicate that these returns cannot be attributed to any
particularMonday(s) of themonth. In addition, the significantly positive Monday
returns observed inRussia are found to be driven by positive returns in the first
threeMondays of themonth.
Consequently, with the possible exception of Estonia, the results for theEast
ern European emerging stockmarkets provide no statistical evidence to suggest
the presence of a Monday return anomaly. Therefore, it follows that no trading

62 EMERGINGMARKETSFINANCEAND TRADE
rule based on a predictable pattern forMonday stock returns can be exploited to
generate abnormal returns in these markets. The absence of a Monday effect in
thesemarkets may suggest thatdespite speculation that emerging markets might
exhibit inefficiencies at theirearly stage of development, a certain level ofmarket
efficiency actually does exist in the emerging and reemerging stockmarkets of the
EEEM.
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States,
call 717-632-3535.


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July-August 2004, pp. 53-62.