Investor Psychology, Mood Variations, and Sustainable Cross-Sectional Returns: A Chinese Case Study on Investing in Illiquid Stocks on a Specific Day of the Week

摘要

This paper uncovers a new finding of sustainable cross-sectional variations in stock returns explained by mood fluctuations across the days of the week. Long/short leg of illiquid anomaly returns are extensively related to the days of the week, and the magnitude of excess returns is also striking [Long leg refers to portfolio deciles that earn higher excess returns. Historical evidence suggests that more illiquid stock earn higher excess returns ( Amihud, 2002 ; Corwin and Schultz, 2012 )]. The speculative leg of illiquid anomalies is the long leg ( Birru, 2018 ) [The speculative leg falls into the long leg of anomaly because more illiquid stocks are sensitive to investor sentiment ( Birru, 2018 )]. Therefore, the long (speculative) leg experiences more sustainable high returns on Friday than the short (non-speculative) leg. At the same time, relatively higher long (speculative) leg returns were witnessed on Friday than Monday with a greater magnitude difference. These cross-sectional variations in illiquid stocks on specific days are consistent with the explanation of the limit to arbitrage. The observed variations in cross-sectional returns are sustained and consistent with plenty of evidence from psychology research regarding the low mood on Monday and high mood on Friday.