Chinese institutional investors and Kamara’s Monday effect

 

Abstract

Mondays exhibit lower stock returns than Fridays, which is known as the Monday effect. Kamara (1997) argued that the Monday effect disappeared due to institutional trading and the introduction of derivative instruments. Our paper tests this hypothesis using Chinese data. As institutional investors are unimportant and arbitrage possibilities limited, the Monday effect should not disappear – but we find the opposite. Modeling the conditional expected utility of an individual investor, we show that the trading strategy, sell on Monday and buy next Friday, yielded positive outcomes. Hence, trading incentives existed and led to the disappearance of the Monday effect in China.

 

JEL Classification: K22, G28, C22

Key words: Monday effect, China, anomalies, institutional investors