The Day of the Week Effect

Bishops University Department of Economics The Day-of-the-Week load epitome of Trends in the day-to-day knuckle unders of Copper and Aluminum Lucas Zawislak and Jennifer Lee Dr. M. Vigneault Applied Economic Analysis March 15th, 2013 Introduction According to the classical school of economics, asset securities industrys atomic number 18 assumed to be both efficient and random.These 2 assumptions ar the etymon from which two neoclassical theories are derived 1) The Efficient Market Theory infers that the market is remarkably adept in its utilization of information while 2) The stochastic Walk Model infers that accurate predictions of outcome cannot be made on the basis of historical data. In summation, it is assumed that the bell behavior of assets is essentially random, and all relevant information is almost immediately incorporated into price. in that respect are two key elements, in reference to market participants or closing noblemans, engrained in the neoclassical position.First, it is presumed that the decision maker is rational and where forward makes decisions using the expected utility function. Second, this position reasons that each decision maker has access to, and uses, full information about the fundamental valuations of assets. Consequently, the market should be comprised of distinctly in subject, fully informed and rational decision makers. Contrary to the neoclassical beliefs studies have unc everyplaceed irregularities, in asset returns, over specific ranges in meter, specifically over the days of the week.This observed unusual person is commonly referred to as The-Day-of-the-Week-Effect which challenges the notion of market efficiency and randomness. It proposes that the distribution of returns may vary according to the day of the week. The most distinct characteristic of this anomaly is a pattern of positive returns on Friday coupled with negative returns on Monday, also known as the weekend effect. Purpose and pauperism The objectives of this study are to determine if there is evidence of the day-of-the week-effect in the each week price fluctuations of both Copper and Aluminum.More specifically, we allow for determine if the assets returns are dependent on the day of the week in which they are generated. If this is proven true, it depart have implications on the behavior of market participants in regards to the trading of these commodities. It would be difficult to directly and consistently exploit this effect each week, payable to high transaction costs. The situation in which this could be best work would be when there are plans to add one of these commodities to a portfolio, repayable to some strategic objective.In this case it would be advantageous to be aware of the effect and know exactly which day of the week the prices would be at their lowest. As I mentioned above, this anomaly will be tested against two base metals (commodities) copper and aluminum. Copper is the third most widel y utilise metal in the world, and is highly versatile. It is a base metal utilize in building construction, power generation, transmission, electronic product manufacturing, and the production of industrial machinery and transportation vehicles. Aluminum is a substitute for copper and is employ in many of the same coverings.Though the two metals are similar in application aluminum is a much cheaper alternative. When you familiarize yourself with the uses of both metals it becomes evident that they are essential to urban modernization. The affect for base metals is primarily fueled by economic growth, and though economic growth in the western hemisphere has slowed, countries such as China and India are experiencing a significant upward trend. Base metals are vital to this growth. On account of this demand, copper is in decreasing grant and due to uncertainty about future supply this is likely to translate into price volatility.When making a purchase decision this volatility c an be offset by the knowledge of the price trends. Aluminum is still in good supply and due to its similitude to copper its demand is increasing. Method We have collected data on Copper and Aluminum prices, as reported on the London admixture Exchange, from January 2nd 2009 to February 15th 2013. The standard OLS method will be used to test the day-of-the-week effect in each of the commodities returns by regressing the data of the returns on the five chance(a) dummy variables.The regression model below will be the base from which all analysis will take place. basically the commodity prices will be the dependent variables in the regression, while time will be the independent variable. Regression Model I Ri=the daily yied of the asset D1=1 if Monday=0 differently D2=1 if Tuesday=0 other D3=1 if Wednesday=0 otherwise D4=1 if Thursday=0 otherwise D5=1 if Friday=0 otherwise **Null Hypothesis of Interest Daily Return Equation Rt=(PtPt-1-1)*100 Descriptive Statistics The descriptive statistics reflect the fore mentioned metal profiles. On verage copper returns are 43% higher than that of Aluminum. In terms of standard deviation the returns for both are quite similar. both graphs indicate increasing volatility of returns, yet this is much more heavy(a) for copper. This pattern supports my previous statement indicating decreasing supply and increasing demand as a source of volatility. The large range given by the minimum and maximum returns is another indication of the volatility of returns for both metals deeds Cited Berument, M. , and Nukhet Dogan. Stock Market Return And Volatility Day-Of-The-Week Effect. Journal Of Economics & pay 36. 2 (2012) 282-302. argumentation Source Complete. Web. 12 Mar. 2013. Boudreaux, Denis, Spuma Rao, and Phillip Fuller. An Investigation Of The Weekend Effect During Different Market Orientations. Journal Of Economics & finance 34. 3 (2010) 257-268. Business Source Complete. Web. 12 Mar. 2013. Derbali, Abdelkader, and Noureddi ne Khadraoui. Day Of The Week Effect On Assets Return Case Of The Stock Exchange Of Casablanca. Journal Of Business Studies Quarterly 3. 1 (2011) 274-283. Business Source Complete.Web. 15 Mar. 2013. Hassan Chowdhury, Shah Saeed, and Rashida Sharmin. 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