Risky Short Positions and Investor Sentiment: Evidence from the Weekend Effect in Futures Markets

Abstract

Theoretical predictions and empirical results are ambiguous about existence of seasonality in futures markets. This paper examines one prominent seasonality, i.e. the weekend effect in futures markets and presents rational and behavioral reasons for its existence. Specifically, we document a weekend effect (Friday’s return minus the following Monday’s return) in futures markets. The weekend effect occurs partly because of asymmetric risk between long and short positions around weekends; the weekend effect increases when short positions are relatively more risky. In addition, we find that both lagged and contemporaneous changes in investor sentiment are related to the weekend effect. These results are consistent with the literature on investor sentiment that finds that mood improves on Fridays but deteriorates on Mondays.

Keywords: futures markets; weekend effect; asymmetric risk; investor sentiment; short selling

JEL Classification: G14; G23