Oct

20

In honor of Friday's perilous drop, checked October Friday (Ths cls-Fri cls) and weekend (Fri cls-Mon cls) returns in SP500 index, both before and after Oct 1987. Its being 20 years since that fateful month, the post-sample is 1988-2007 and the pre-sample 1967-1986.

Here is regression of weekend vs Friday pre-1987:

The regression equation is
F-M pre = 0.00071 + 0.462 Fri pre

Predictor    Coef   SE Coef     T      P
Constant  0.0007  0.0011  0.65  0.520
Fri pre      0.4617  0.1313  3.52  0.001

S = 0.0103498   R-Sq = 12.4%   R-Sq(adj) = 11.4%

Weekend strongly correlated with Fridays.  

What about Octobers after 1987?

The regression equation is
F-M post = 0.00145 + 0.0333 Fri post

Predictor    Coef   SE Coef     T      P
Constant  0.0014  0.0012  1.13  0.261
Fri post    0.0333  0.0969  0.34  0.732

S = 0.0116829   R-Sq = 0.1%   R-Sq(adj) = 0.0%

Poof! No more weekend effect.

As an extension on this extension, here is a check on symmetry of pre-87 weekend effect.  Re-ran regression with 2 independent variables:

Fri preUP = Friday return if up, otherwise 0

Fri preDN = Friday return if down, otherwise 0

The regression equation is
F-M pre = - 0.00147 + 0.732 Fri preUP + 0.019 Fri preDN

Predictor       Coef   SE Coef      T      P
Constant   -0.0015   0.0017  -0.87  0.387
Fri preUP   0.7324   0.2061   3.55  0.001
Fri preDN   0.0190   0.2922   0.06  0.948

S = 0.0102408   R-Sq = 15.3%   R-Sq(adj) = 13.3%

Prior to 1987, positive weekend correlation with Friday returns arose from continuation of up Fridays (as opposed to continuation of downs).


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