The Day of the Week Effect

Bishops University Department of economics The Day-of-the-Week instal Analysis of Trends in the Daily Returns of bulls eye and atomic number 13 Lucas Zawislak and Jennifer Lee Dr. M. Vigneault Applied Economic Analysis March 15th, 2013 Introduction According to the neoclassic school of sparings, plus marts atomic number 18 assumed to be both efficient and random.These both assumptions are the base from which two neoclassical theories are derived 1) The Efficient commercialize Theory infers that the market is remarkably adept in its utilization of instruction while 2) The Random Walk Model infers that accurate predictions of outcome cannot be made on the base of operations of historical data. In summation, it is assumed that the expenditure behavior of assets is essentially random, and all relevant information is just about immediately incorporated into price. There are two key elements, in reference to market participants or decision makers, engrained in the neoclassic al position.First, it is presumed that the decision maker is rational and therefore makes decisions using the expected utility(prenominal) function. Second, this position reasons that each decision maker has access to, and uses, full information about the fundamental valuations of assets. Consequently, the market should be comprised of distinctly individual, fully informed and rational decision makers. Contrary to the neoclassical beliefs studies have uncovered irregularities, in asset returns, over specific ranges in time, specifically over the geezerhood of the week.This observed anomaly is commonly referred to as The-Day-of-the-Week-Effect which challenges the notion of market efficiency and randomness. It proposes that the distribution of returns may veer according to the day of the week. The most distinct characteristic of this anomaly is a pattern of positive returns on Friday coupled with negative returns on Monday, also known as the weekend effect. Purpose and motivatio n The objectives of this study are to determine if there is evidence of the day-of-the week-effect in the weekly price fluctuations of both Copper and Aluminum.More specifically, we will determine if the assets returns are dependent on the day of the week in which they are generated. If this is turn out true, it will have implications on the behavior of market participants in regards to the trading of these commodities. It would be difficult to this instant and consistently exploit this effect each week, due to high transaction costs. The situation in which this could be best exploited would be when there are plans to add one of these commodities to a portfolio, due to some strategic objective.In this case it would be advantageous to be aware of the effect and know exactly which day of the week the prices would be at their lowest. As I mentioned above, this anomaly will be tryed against two base metals (commodities) copper and aluminum. Copper is the third most widely used metal in the world, and is exceedingly versatile. It is a base metal used in building construction, power generation, transmission, electronic product manufacturing, and the yield of industrial machinery and transportation vehicles. Aluminum is a substitute for copper and is used in many of the very(prenominal) applications.Though the two metals are similar in application aluminum is a much cheaper alternative. When you familiarize yourself with the uses of both metals it becomes evident that they are essential to urban modernization. The indigence for base metals is primarily fueled by economic growth, and though economic growth in the western hemisphere has slowed, countries such as China and India are experiencing a significant upward trend. Base metals are vital to this growth. On account of this occupy, copper is in decreasing supply and due to uncertainty about future supply this is likely to translate into price volatility.When making a purchase decision this volatility can be offset by the intimacy of the price trends. Aluminum is still in good supply and due to its likeness to copper its demand is increasing. Method We have collected data on Copper and Aluminum prices, as reported on the London Metal Exchange, from January 2nd 2009 to February 15th 2013. The standard OLS method will be used to test the day-of-the-week effect in each of the commodities returns by regressing the data of the returns on the five daily dummy variables.The degeneration model below will be the base from which all analysis will take place. essentially the commodity prices will be the dependent variables in the regression, while time will be the independent variable. Regression Model I Ri=the daily yied of the asset D1=1 if Monday=0 otherwise D2=1 if Tuesday=0 otherwise D3=1 if Wednesday=0 otherwise D4=1 if Thursday=0 otherwise D5=1 if Friday=0 otherwise **Null Hypothesis of Interest Daily Return Equation Rt=(PtPt-1-1)*100 Descriptive Statistics The descriptive statistics ref lect the fore mentioned metal profiles. On verage copper returns are 43% higher than that of Aluminum. In ground of standard deviation the returns for both are quite similar. Both graphs indicate increasing volatility of returns, provided this is much more prominent for copper. This pattern supports my previous statement indicating decreasing supply and increasing demand as a source of volatility. The large range given by the minimum and maximum returns is some other indication of the volatility of returns for both metals Works Cited Berument, M. , and Nukhet Dogan. Stock Market Return And Volatility Day-Of-The-Week Effect. Journal Of Economics & Finance 36. 2 (2012) 282-302. calling opening Complete. Web. 12 Mar. 2013. Boudreaux, Denis, Spuma Rao, and Phillip Fuller. An Investigation Of The Weekend Effect During Different Market Orientations. Journal Of Economics & Finance 34. 3 (2010) 257-268. Business Source Complete. Web. 12 Mar. 2013. Derbali, Abdelkader, and Noureddine K hadraoui. Day Of The Week Effect On Assets Return Case Of The Stock Exchange Of Casablanca. Journal Of Business Studies Quarterly 3. 1 (2011) 274-283. Business Source Complete.Web. 15 Mar. 2013. Hassan Chowdhury, Shah Saeed, and Rashida Sharmin. 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