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Abstract
This study examines trading day and calendar day returns-generating processes and tests the weekend effect in the corporate bond market. We reject the calendar day hypothesis while the trading day hypothesis cannot be rejected as the corporate bond's returns-generating process. Furthermore, we find a "reverse" weekend effect in the corporate bond market in that Monday returns are on-average positive and statistically significant in this sample.
I. Introduction
Studies show that there is generally a negative price change across weekends in the equity markets, but what about the corporate bond prices? In this study, the behavior of corporate bond prices across weekends is analyzed, using the Merrill Lynch corporate bond index. Specifically, we test the calendar day and the trading day hypotheses in corporate bond markets.
According to the trading day hypothesis, bond returns- including accrued interest paymentsare based solely on the active trading day. That is, the bond market must be active to provide price changes that result in returns generation. However, according to the calendar day hypothesis, bond returns accumulate on the basis of the number of elapsed calendar days. Since financial markets are closed on weekends, the calendar day hypothesis predicts that returns for Saturday and Sunday are stored and reflected in Monday's return. Therefore, based on this hypothesis, Monday returns should be three times the size of returns of other weekdays.
The processes that generate stock returns are the subjects of papers by Fama (1965, 1970, 1976), French (1980), Lakonishok and Levi (1982), Rogalski (1984), Keim et al. (1984), Jaffe and Westerfield (1985), Smirlock and Starks (1986), and Board and Sutcliffe (1988). Other recent research efforts have sought to determine the effect of the day of the week on currency returns, stock returns, stock index futures, and gold markets [see Dyl and Maberly (1986,1988), Ma (1986), Junkus (1986), among others]. These studies show that the prices of these financial investment instruments drop abnormally on Mondays. This well documented phenomenon is known as the "weekend effect." Researchers agree on the existence of the weekend effect; however, the source of this phenomenon has been elusive and does not easily lend itself to verification.
Flannery and Protopapadakis (1988) examine intraday returns' seasonality in Treasury bills (T-bill), bonds (T-bonds), and stocks and find...