TAILIEUCHUNG - STOCK RETURNS AND THE WEEKEND EFFECT

To the extent that earnings and book values are some of the factors used to weight stocks in the portfolio, FI will systematically overweight “value” stocks and underweight “growth” stocks. Moreover, to the extent that FI attempts to underweight stocks with (temporarily) high market capitalizations, there will be a tendency for an FI portfolio to contain smaller-capitalization stocks compared with a cap-weighted index. According to Eugene Fama and Kenneth French (2007), RAFI is a “triumph of marketing, and not of new ideas.” It’s simply a “repackaging” of ideas that have been in the academic literature for. | Journal of Financial Economics 8 1980 55-69 North-Holland Publishing Company STOCK RETURNS AND THE WEEKEND EFFECT Kenneth R FRENCH University of Rochester Rochester NY 14627 USA Received October 1979 final version received February 1980 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 five-year subperiods 1. Introduction The process generating stock returns has been one of the most popular topics of research in finance since Bacheher s pioneering article published in 1900 1 Although many authors have addressed this issue 2 several questions have not been resolved One of these IS whether the process operates continuously or only during active trading Since most stocks are traded only from Monday through Friday if returns are generated continuously in calendar time the distribution of returns for Monday will be different from the distribution of returns for other days of the week On the other hand if stock returns are generated in trading time the distribution of returns will be the same for all five days of the week Several researchers have examined this issue by studying the variance of price changes For example Fama 1965 tests the hypothesis that returns 1 would like to thank Michael Bradley Peter Dodd Martin Geisel Michael Jensen Richard Leftwich Wayne Mikkelson Charles Plosser Richard Ruback Clifford Smith Jerold Warner the .

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