Day of the Week Effect in biotechnology stocks: An Application of the GARCH processes

TL;DR

This paper investigates the day-of-the-week effect on biotechnology stock returns over 16 years, revealing lower returns on Mondays and higher returns on later weekdays, influenced by momentum and small-firm effects.

Contribution

It applies asymmetric GARCH models to identify the day-of-the-week effect and its relation to market risk factors in biotechnology stocks.

Findings

Lower returns on Mondays compared to other weekdays

Higher returns on Wednesdays, Thursdays, and Fridays

Momentum and small-firm effects positively influence returns

Abstract

This study examines the presence of the day-of-the-week effect on daily returns of biotechnology stocks over a 16-year period from January 2002 to December 2015. Using daily returns from the NASDAQ Biotechnology Index (NBI), we find that the stock returns were the lowest on Mondays, and compared to the Mondays the stock returns were significantly higher on Wednesdays, Thursdays, and Fridays. Moreover, the results from using the asymmetric GARCH processes reveal that momentum and small-firm effect were positively associated with the market risk-adjusted returns of the biotechnology stocks during this period. The findings of our study suggest that active portfolio managers need to consider the day of the week, momentum, and small-firm effect when making trading decisions for biotechnology stocks.