Impact of market volatility on the day-of-the week effect in stocks, crude oil, and palm oil markets for variations in market efficiency

Efficient markets play a crucial role in allocating resources effectively. With the growing interest in behavioural finance, there is a need to closely examine the complex relationship between investors' behaviour and the efficient market hypothesis (EMH). The day-of-the-week effect, a phenomenon where stock prices tend to exhibit predictable patterns based on the day of the week, challenges the EMH and aligns with behavioural finance concepts. Despite extensive research on this effect in stock and commodity futures markets, there is a gap in understanding how volatility influences the day-of-the-week effect, despite its significant impact on investment decisions. This study aims to investigate how market volatility affects the day-of-the-week effect, providing insights into market behaviour under different volatility conditions. The research focuses on the U.S. stock markets, West Texas Intermediate (WTI) crude oil futures markets, and Malaysia palm oil futures markets, chosen for their unique characteristics. The Integrated Cumulative Sum of Squares (ICSS) model is used to detect changes in volatility, while the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model is employed to identify the day-of-the-week effect. The findings reveal a strong correlation between the day-of-the-week effect and market volatility, particularly pronounced when volatility is low and diminishing when it is high. Each market exhibits unique day-of-the-week effect patterns influenced by various factors. For instance, the U.S. stock market shows a significant weekend effect driven by investor sentiment. Similarly, the WTI crude oil market experiences abnormal returns from Monday to Wednesday, linked to negative sentiment on Mondays and deviations from expected inventory levels on Wednesdays. In contrast, the crude palm oil market sees abnormal returns on Tuesdays, influenced by soybean oil returns. The study underscores the importance of adapting strategies to changing market conditions, considering factors such as volatility, sentiment, and external shocks. It highlights the dynamic nature of market efficiency and the need for flexible approaches to investment.

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