Definition
The term weekend effect is used to describe a historical trend, whereby financial markets tend to decline more on Monday if there was a decline on the preceding Friday. The weekend effect is believed to be a result of increased investor pessimism on Saturday and Sunday.
Explanation
Financial markets, such as commodities, bonds, and stocks, typically demonstrate an upward or downward trend over time. Generally, if there was a decline in a financial market on a Friday, the same financial market would be expected to decline to a greater extent on the following Monday.
The weekend effect is of extremely short duration, spanning across only three days. This phenomenon has been validated via a number of scholarly studies; however, the exact reason for this effect is uncertain, but is believed to be a result of the following factors:
Companies have a tendency to release negative earnings outlooks after the closing of markets on Fridays.
As investors reflect on a decline in a financial market over the weekend, pessimism begins to take hold, and manifests itself as an even larger sell off of stocks on the following Monday.
Related Terms
Monday effect, suckers' rally, January effect, catching a falling knife
