Do Short Sellers Cause the Weekend Effect?

Honghui Chen and Vijay Singal

Volume 1, Number 3, Third Quarter 2003

We provide a new explanation for the weekend effect. Our hypothesis is based on the contention that speculative short sellers are unwilling or less likely to hold their positions over long non-trading periods, typically the weekend. Therefore, they buy to cover on Fridays and reopen their positions on Mondays causing Friday returns to be larger than Monday returns. We find evidence in support of this hypothesis based on a comparison of high short-interest stocks and low short-interest stocks, stocks with and without actively traded options, IPOs, zero short-interest stocks, and highly volatile stocks. We discuss trading implications of the finding.