Daily effects

Today is the 13th successive Tuesday on which the FTSE 100 has fallen - a fact made all the more remarkable because the market has risen over the last 13 weeks.
This draws attention to the possibility that some days are better for the stock market than others. Here are average daily changes in the FTSE 100 since January 1 2005:
Monday = 0.124%
Tuesday = 0.011%
Wednesday = -0.033%
Thursday = 0.042%
Friday = 0.206%
The difference between Friday and Tuesday or Wednesday (and the average of Monday-Thursday) is statistically significant at the 5% level.
Put this another way. If every day were like Tuesday, the FTSE 100 would only have risen 3.8% since January 1 2005 instead of 24.7%.
This is not a new finding. A famous paper (not webbed) by Josef Lakonishok and Seymour Smidt found that the Dow Jones did far better on Fridays than average between 1897 and 1986; for more on this, see the papers here.
And Brian Lucey has found that Friday is also a good day for base metals prices.
The reason for this, I guess, is simple. People are cheerier on Friday as the weekend approaches, and this cheerfulness leads to a willingness to take risk. By contrast, they're more miserable and tired earlier in the week, and so less willing to take risk.
Now, I wouldn't want to trade on these differences. But there are three lessons nevertheless:
1. Some apparently strange things move share prices. It's not just the economy and companies that matter.
2. You shouldn't infer much about the economy or companies from a stock market fall in mid-week, or a rise on a Friday.
3. We can't easily remove emotions from decision-making. The belief to the contrary is just (another) rationalist illusion.
As I say, the stock market matters because of the light it sheds upon human nature.

Comments

[martin]

I'm surprised by the finding that shares outdo their average day on Fridays. In bond and currency markets, there is a well-known Friday effect, which is due in part to the fact that a small but significant percentage of the trading population are taking risk with an overnight horizon - weekends are riskier than the average weeknight both because they are longer, and because events like G7 meetings occur at weekends, and even because of Sunday newspaper articles. So bonds and the US dollar (depending on whether it is in fashion) tend to do well on Fridays.

Perhaps equity traders and investors are responding to the fact that one, perhaps a dominant, risk that they face is the risk of being out of the market? Buy now or miss out on the Monday morning rally?

I think this might have more to do with the effect than cheerfulness, but there's also the timing of retail and pension inflows into funds, fund manager meetings, economic releases (Friday is the major day for US data) and so on, and I think it would be very difficult to do a thorough factor analysis...

Actually, given that the major economies have done very well over the last century, and that this news comes out on Fridays, perhaps the Friday puzzle has a simple macro explanation after all...

[Robert Schwartz]

I would look for option exercises and short position hedging to account for Fridays. Of course, it may all be noise.

[dsquared]

I agree with Martin; this is much more likely to be an institutional or microstructural effect than anything else. I would also hypothesise that your Tuesday effect is related to the fact that FTSE stocks go ex-dividend on Wednesdays; I strongly suspect that your negative number for the "average change" in the index on Wednesdays is an ex-div effect.

[chris]

Sorry, D2 - I was careless in ignoring the ex-div effect. However, it's not big enough to eradicate the difference. Using Datastream's total return index (which adjusts for ex-div effects), Wednesdays' average return is +0.037%, against -0.033% for the price move.
However, even this return is significantly (at the 10% level) lower than Friday's return.
Martin - I agree greater risk should partly explain the Friday effect. But are the risks created by the weekend and US data really large enough to explain why returns are almost 20 times greater on Friday than Tuesday?

[Curious]

I also agree with Martin's comment. The Monday effect (rally) may be too promising a prospect to miss, especially when bolstered by a whole bunch of macro releases on Friday.

[James G]

So, I should try to time my Sharebuilder purchases for Tuesdays, then?

[dave heasman]

Another dreadful Tuesday (if you're long) makes the point again..

[dave heasman]

And today's not looking too good, either.