A posterior odds analysis of the weekend effect

The weekend effect is the tendency for Monday stock returns to be negative. The paper reports a posterior odds evaluation of the day-of-the-week and weekend effect that largely reverses earlier findings. The interaction of large sample sizes and fixed significance level hypothesis testing is identified as the likely source of disagreements between p-values and posterior probabilities. Analysis with informative and relatively diffuse prior distributions indicates this divergence does not apparently reflect special distributional assumptions. Further analysis suggests that earnings announcement behavior and a small number of outliers may account for much of the evidence of systematically negative Monday returns in the few years where posterior odds favor the weekend effect hypothesis.

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