By |Published On: March 4th, 2019|Categories: Basilico and Johnsen, Academic Research Insight|

Day of the Week and the Cross-Section of Returns

  • Justin Birru
  • Journal of Financial Economics, forthcoming
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category

What are the Research Questions?

According to psychology literature, mood increases from Thursday to Friday and decreases on Monday. In general, people tend to evaluate future prospects more optimistically when they are in a good mood than when they are in a bad mood. In equity markets, the presence of optimism or pessimism that is unrelated to fundamentals, usually called sentiment, delivers clear, testable cross-sectional return predictions. Specifically, a change in sentiment will have a contemporaneous effect on returns, with the strongest effect occurring for the prices of stocks that are hard or highly subjective to value and hard-to-arbitrage (Baker and Wurgler, 2006). This hypothesis therefore predicts that relative to non-speculative stocks, speculative stocks(1) will experience low returns on Mondays and high returns on Fridays.

The author investigates the following research question:

  1. Do certain anomalies exhibit return variation across days of the week?
  2. If so, is there evidence that such results are driven by firm specific or macroeconomic news?
  3. Is this day-of-the-week variation related to similar patterns in moods?

What are the Academic Insights?

The author finds the following:

  1. YES- For all anomalies with one speculative and one non-speculative leg ( 19 total are studied in this paper), the long minus short strategy returns exhibit opposite signs on Monday and Friday. Consistent with a mispricing explanation, all of the variation is driven by the speculative leg, not the non-speculative leg. The results remain robustly present for all such anomalies in every subsample period examined. Additionally, the author considers 44 anomalies that do not have a clear speculative and non-speculative leg (i.e. momentum). In this case, there is no evidence of similar day of the week patterns.
  2. NO-  The observed cross-sectional return patterns are robust to the exclusion of firm-specific and macroeconomic news announcements.
  3. YES- Long minus short portfolio returns monotonically increase (decrease) from Monday through Friday for strategies for which the speculative leg is the short (long) leg. These results are related to the small, but growing literature that identifies exogenous changes in mood and shows a causal effect of these changes in mood on stock returns.  Mood is a powerful determinant of individual actions, and changes in mood have been found to induce less than fully rational financial market behavior not just from individual investors, but also from institutional investors.

Why does it matter?

This study documents strong, predictable variation in the cross-section of returns across day of the week for a certain type of anomalies and it also shed some more light on how behavioral finance has an important role in understanding financial markets.

The Most Important Chart from the Paper:

Table 1 shows the list of 19 anomalies studied in this research:

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.


Long-short anomaly returns are strongly related to the day of the week. Anomalies for which the speculative leg is the short (long) leg experience the highest (lowest) returns on Monday. The opposite pattern is observed on Fridays. The effects are large; Monday (Friday) alone accounts for over 100% of returns for all anomalies examined for which the short (long) leg is the speculative leg. Consistent with a mispricing explanation, the pattern is driven by the speculative leg. The observed patterns are consistent with the abundance of evidence in the psychology literature that mood increases on Friday and decreases on Monday.


About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.