The Weekend Effect in Equity Option Returns
Christopher S. Jones
University of Southern California - Marshall School of Business - Finance and Business Economics Department
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
September 22, 2010
AFA 2010 Atlanta Meetings Paper
Marshall School of Business Working Paper No. FBE 03-10
We find that returns on options on individual equities display markedly lower returns over weekends (Friday close to Monday close) relative to any other day of the week. These patterns are observed both in unhedged and delta-hedged positions, indicating that the effect is not the result of a weekend effect in the underlying securities. We find even stronger weekend effects in implied volatilities, but only after an adjustment to quote implied volatilities in terms of trading days rather than calendar days. Our results hold for puts and calls over a wide range of maturities and strike prices, for both equally weighted portfolios and for portfolios weighted by the market value of open interest, and also for samples that include only the most liquid options in the market. We find no evidence of a weekly seasonal in bid-ask spreads, trading volume, or open interest that could drive the effect. We also find little evidence that weekend returns are driven by higher levels of risk over the weekend. The effect is particularly strong over expiration weekends, and it is also present to a lesser degree over mid-week holidays. Finally, the effect is stronger when the TED spread and market volatility are high, which we interpret as providing support for a limits to arbitrage explanation for the persistence of the effect.
Number of Pages in PDF File: 58
Keywords: weekend effect, equity options
JEL Classification: G12, G13, G14working papers series
Date posted: March 22, 2009 ; Last revised: September 17, 2012
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.422 seconds