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Reader and blogger Bruce Hong asks: "Is there any data on what typically happens after a three-day weekend?" Some stock market experts claim that traders move to the sidelines before long weekends to avoid the risk of bad news while the market is closed. Assuming most traders are long, such selling might depress stock prices before extended weekends and elevate them afterward as traders re-enter positions. To test this hypothesis, we perform a modest event study examining returns and volatility for the three trading days before and after three-day weekends. Using daily closing prices for the S&P 500 index since the beginning of 1990, we find that:
The following chart shows the average daily returns for the S&P 500 index during the three trading days before and the three trading days after three-day weekends since the beginning of 1990, with one standard deviation error bars to indicate volatility. Sample size is 106 three-day weekends. The average daily return for all days since the beginning of 1990 (red line) is 0.038%. The chart shows that the differences between average daily returns around three-day weekends and the average return for all days is small in comparison to daily volatility. The average return on the day after three-day weekends is slightly lower than the average return for all days since 1990. Data for two trading days before the weekend (Day -2) and two trading after the weekend (Day 2) offers slight (but too small to trade) support for the hypothesis.
Might a subsample of Memorial Day weekends produce different results?
The next chart shows the average daily returns for the S&P 500 index during the three trading days before and the three trading days after Memorial Day weekends since the beginning of 1990, with one standard deviation error bars to indicate volatility. Sample size is only 17. The average daily return for all days since the beginning of 1990 (red line), as noted above, is 0.38%. This graph shows slight average underperformance the two trading days before the weekend and slight average outperformance after the weekend. However, the subsample is very small, and the degrees of underperformance and outperformance are small compared to return variabilities. Volatility on the day after the weekend is notably high.
Might the behavior of stocks around Labor Days clarify?
The final chart shows the average daily returns for the S&P 500 index during the three trading days before and the three trading days after Labor Day weekends since the beginning of 1990, with one standard deviation error bars to indicate volatility. Sample size is again only 17. The average daily return for all days since the beginning of 1990 (red line) is 0.38%. In this case, the graph shows average outperformance (underperformance) both the day (two days) before and the day (two days) after the weekend. Degrees of outperformance and underperformance are somewhat larger than those depicted above. Volatility on the day after the weekend is notably very high.
The sample/subsample differences shown in the three graphs above provide no reliable indication of three-day weekend anomalies for stock returns. However all three do show high volatility for the day after a three-day weekend.
In summary, there are no reliable anomalies regarding the direction of the stock market around three-day weekends since 1990, but the day after such weekends exhibits wider price swings than most other days. There may pent-up demand after a three-day weekend, but the demand is neither reliably long nor reliably short.
For related research, see Blog Synthesis: Calendar Effects.
