The Day of the Week Effect of Stock Returns: Empirical Evidence from the Colombo Stock Exchange

Abstract

Introduction: The purpose of this study is to investigate the Day-of-the-Week Effect on stock returns in the Colombo Stock Exchange (CSE), examining whether specific days consistently exhibit abnormal returns. By analyzing the All-Share Price Index (ASPI) data from 2014 to 2024, the research explores how economic crises, such as the Easter Sunday Attack (2019), the COVID-19 pandemic, and Sri Lanka’s financial collapse (2022), influenced these anomalies.

Methodology: Statistical techniques, including Ordinary Least Squares (OLS) regression and unit root tests, confirmed the presence of significant daily return patterns. The data sample consists of daily stock returns of all companies listed on the All Share Price Index (ASPI) from April 2014 to April 2024. The data was analyzed in two distinct periods: pre-crisis (2014–2019) and post-crisis recovery (2019–2024). Secondary data was used and retrieved from the CSE website.

Findings: Mondays consistently recorded negative returns across all periods, suggesting a “Monday effect.” Thursdays showed the most significant positive returns, particularly during the post-crisis recovery period (2019–2024).

Conclusion: The study confirms the existence of the day-of-the-week effect in the Colombo Stock Exchange, with distinct variations during economic crises and recovery periods. These findings underscore the need for further exploration into behavioural finance and its role in emerging markets. Future studies should include cross-market analyses to broaden understanding and applicability. The study provides recommendations to investors and policymakers; investors can understand these patterns and use them to enhance their trading strategies, optimizing buy-sell decisions based on predicted daily returns. Policymakers can gain insights into market inefficiencies and offer opportunities to improve regulatory frameworks and foster greater stability.