Are Stock Returns Different Over Weekends? A Jump Diffusion Analysis of the Weekend Effect

This study examines the distribution of daily returns on five popular stock price indices, with a special emphasis on the difference between returns over weekends and returns over adjacent intraweek trading days. We revisit the "weekend effect" in common stock returns, focusing on two characteristics of differential returns over intraweek trading days and over weekends: the "drift" and the "volatility". Section I of this article describes the simple diffusion model of stock returns, upon which much of modern finance rests. It also describes the jump diffusion model, upon which this paper rests. Section II summarizes the literature on the weekend effect, reporting on the evidence supporting its existence and on some possible explanations grounded in economic theory. Section III discusses the estimation methods used, while section IV discusses the data used in this paper. Section V reports the results, which are summarized just below. The article concludes with a summary. We find that a jump diffusion model is superior to a simple diffusion model, and that the jump diffusion model of stock returns provides strong support for the weekend effect. For large-cap indices, like the Dow 30 and S&P 50, the normal return (or "drift") over weekends is positive but significantly less than the intraweek drift. For small-cap stock price indices, like the Russell 2000 and the Nasdaq Composite, the weekend drift is actually negative. Thus, much of the tendency for price declines over weekends is confined to stocks of small companies.