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Monday effect is a theory that describes market trends in which the trading pattern of Friday will continue at the opening of trade on Monday. This theory is often used in the Stock market, it shows hoe returns and prevailing patterns of a previous Friday comes up on Monday rather than any other day. Therefore, if there was a rise or fall in the market the previous Friday, this will continue till Monday.
The Monday effect is otherwise called the “weekend effect.” This effect shows this correlation between two trading days; Friday and Monday.
A Little More on What is the Monday Effect
Sometimes, there are diverging opinions about what the Monday effect is. For instance, many believe that returns on the stock market on Mondays are often less that returns recorded on other trading days. Typically, the Monday effect is a theory that maintains that trading patterns and trends on the previous Friday will influence what the market will experience the following Monday. It also holds the belief that there is a tendency for market returns to be lower o negative on Monday as an aftermath of what the Friday trading gives.
The rationale behind the Monday effect remains unclear as there are diverse explanations for this effect. However, a given Monday tends to mirror the trading trends that occurred on the previous Friday.
History of the Monday Effect
The existence of the Monday effect is quite a mysterious one, not only is there no strong reason behind this effect, no one theory has been able to justify o explain the Monday effect. Frank Cross was the first analyst that reported the anomaly of the Monday effect in 1973 in his article titled “The Behavior of Stock Prices on Fridays and Mondays.” Fran Cross explained how the average returns of the previous Friday exceed the average return of the following Monday as well as the continuation of trading patterns of the previous Friday on the next Monday.
The Monday effect also maintains that there is a recurrence on the average return from Friday (whether positive, low, or negative) on the following Monday. While many attribute the Monday effect to short selling in the stock market, others attribute this effect to a decline in a trader’s enthusiasm between the previous Friday and the following Monday.