Monday Effect in the RMW and the Short‐Term Reversal Factors

• Author: Fahad Ali,Numan Ülkü
• DOI: http://doi.org/10.1111/irfi.12185
• Published date: 01 September 2019
• Date: 01 September 2019

Monday Effect in the RMW and the

Short-Term Reversal Factors

FAHAD ALI

†

AND NUMAN ÜLKÜ

‡

†

College of Economics, Zhejiang University, Hangzhou, China and

‡

School of Commerce, University of South Australia Business School, Adelaide, South

Australia, Australia

ABSTRACT

We document that the positive (opposite) Monday or early-in-the-week

effect in Fama–French’s robust-minus-weak (RMW) factor, first reported by

Ülkü (2017), is pervasive across international markets, ruling out data-snoop-

ing. As in the United States, the pattern has strengthened over time. Monday

effect in RMW is linked to a combination of institutional investor trading

pattern and the weekend sound-mind effect. We devise a test of the external

validity of the weekend sound-mind effect hypothesis: the short-term rever-

sal factor, which is profitable within its holding period but leads to larger

losses subsequently, exhibits a significant negative Monday effect, as pre-

dicted by this hypothesis. Mondays buck fads.

JEL Codes: G14

Accepted: 25 January 2018

I. INTRODUCTION

Fama and French’s (2015) addition of the robust-minus-weak (RMW) gross prof-

itability and the conservative-minus-aggressive (CMA) investment factors to

form the so-called Fama–French (FF) five-factor model has triggered debate in

several fronts. One of them is about whether the new factors represent a priced

risk or behavioral mispricing. In this respect, Ülkü (2017) argues that the RMW

factor picks mispricing due to neglected value, and reports a strong positive

(opposite) Monday effect in the RMW factor premium. (As Tuesday returns of

the RMW factor are similar to Monday, he terms it as “early-in-the-week

effect”.) Moreover, the strength of the pattern appears to have increased over

time, defying the trend of vanishing anomalies. In the United States, 94% of

FF’s RMW factor premium is earned on Mondays; and 135% of it is earned on

Mondays and Tuesdays, leaving the premium estimate for the rest of the week

negative. Thus, the RMW factor premium is merely a Monday or early-in-the-

[Correction added on 2 March 2018, after first online publication: The affiliations have been cor-

rected to ‘College of Economics, Zhejiang University, Hangzhou, China’and ‘School of Commerce,

University of South Australia Business School, Adelaide, South Australia, Australia’]

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:3, 2019: pp. 681–691

DOI: 10.1111/irfi.12185