Are Stock Returns Different over Weekends? A Jump Diffusion Analysis of the “Weekend Effect”

Are Stock Returns Different over Weekends? A Jump Diffusion Analysis of the " Weekend Effect " T he distribution of returns on common stocks is, arguably, one of the most widely studied financial market characteristics. Among the questions addressed by these studies are the following: Is the return on common stocks normally distributed, as much finance theory assumes? How many stocks should be included in a portfolio if it is to achieve most of the benefits of diversification? How has the volatility of stock returns changed over time? How is the distribution of returns affected by past returns? What influence do calendar events have on the return distribution (for example, the January effect, the Monday effect)? The performance of stock prices during breaks in trading has also received considerable attention in recent years, especially since the advent of " circuit breakers " designed to create stability when markets are chaotic. Some studies have focused on performance surrounding periods of unscheduled trading breaks, such as trading halts in individual stocks and triggering of exchange-wide circuit breakers. These studies hope to establish whether a trading break during the " fog of battle " helps to stabilize the stock market. Other studies look at performance around periods of scheduled trading breaks (holidays, weekends). Some of these are designed to obtain insight into whether trading breaks serve to stabilize or destabilize markets. Other studies in this genre are designed to determine whether there are financial market anomalies associated with days of the week. 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