Do common variations in liquidity exhibit a U-shaped pattern across weekdays?

Mohsen M. Saad

Applied Financial Economics Letters, 2006, vol. 2, issue 1, pages 65-68

Abstract: Anomalies and stock returns have been studied thoroughly in the realm of asset pricing. This work is motivated by the lack of such studies on liquidity co-variation patterns. Earlier research documents market-wide commonality in liquidity. However, empirical work on the temporal behaviour of this observed commonality across trading weekdays has surprisingly been nonexistent. Given the well documented inverted U-shaped pattern of trading activity across weekdays, and the negative relation between trading costs and volume, it is argued that commonality in liquidity should exhibit a U-shaped pattern across weekdays. The empirical evidence supports this hypothesis. In particular, liquidity co-variations were found to be significantly higher on Mondays and Fridays. The contention that liquidity co-variations exhibit a U-shaped pattern is undoubtedly of interest to portfolio managers, investors, egulators, and academics.

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