An Investigation into the Role of Short-Selling and Its Impact on the Weekend Effect – Evidence from Australian Market

Abstract

This research paper has two objectives. First, whether the Weekend Effect anomaly documented in the literature exists in the Australian Stock Exchange (ASX). Second, whether the existence of the Weekend Effect can be attributed to the role of short-sellers. Using daily data for the period from January 1994 to December 2007, this study observes a strong Weekend Effect in equal-weighted index and small-cap stocks. As the size of the firm increases the Weekend Effect starts to disappear due to significantly negative Monday returns for smaller firms and significantly positive Monday returns for larger firms.

Further, this research does not find evidence that speculative short-sellers add to the Weekend Effect. Rather this study reveals an opposite finding, that when short-sellers are more active the Weekend Effect diminishes and when short-sellers are less active, the study observes strong Weekend Effect. However, this result is not robust with regard to the assumed relationship between the Weekend Effect and stocks with tradable options.