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This study uses stochastic dominance with and without risk-free assets to examine whether trading days can affect patterns of the day-of-the-week effect in the Taiwan foreign exchange market. Our results generally indicate that higher returns appear on the first three days of the week across different trading-day regimes in the Taiwan foreign exchange market, confirming day-of-the-week effect. Allocating part of investors’ assets in risk-free assets is useful in distinguishing returns among weekdays for all currencies.

In the last three decades of financial research, one of the distinctive return patterns of financial assets is the day-of-the-week effect. That is, returns of equity assets appear to be lower on Monday as compared to other days of the week (Cross, 1973, French, 1980 and Harris, 1986). Ritter and Chopra, 1989, Lakonishok and Maberly, 1990, DeFusco et al., 1993, Al-Loughani and Chappell, 2001 and Tonchev and Kim, 2004 find the average Monday return of stocks is negative in the US and some emerging stock markets. Similarly, Stickel, 1982 and Roll, 1983 document the day-of-the-week effect in futures prices and Gibbons and Hess (1981) in Treasury bills returns. McFarland et al. (1982) have first documented the day-of-the-week effect in the foreign exchange market. Their empirical results show that Monday and Wednesday offer higher average returns than Thursday and Friday, a finding also later confirmed by So, 1987 and Cornett et al., 1995. Aydoğan and Booth (2003) reveal that returns in the Turkish foreign exchange markets are generally higher on Tuesday and Wednesday and lower on Friday. Recently, Yamori and Kurihara (2004) find that the day-of-the-week effect exists in the 1980s for some currencies, but disappears for almost all currencies in the 1990s in the New York foreign exchange market. The goal of the study is to investigate if there is day-of-the-week effect in the Taiwan foreign exchange market. We use daily data on eight currencies with respect to New Taiwan dollar: Australia dollar, Canada dollar, Euro, Hong Kong dollar, Japan yen, Swiss franc, United Kingdom pound, and US dollar from 1992 through 2006.1 The Taiwan market offers several interesting features for our examination as follows. First, our data enable us to examine if changes of trading-day regimes affect the potential day-of-the-week effect. Prior to 1952, the New York Stock Exchange (NYSE) conducted six-day trading in a week (i.e., one-day weekend). Since 1952, it has been only five-day trading in a week (i.e., two-day weekend). Keim and Stambough (1984) find a higher return on the last trading day of the week, no matter whether it was Friday or Saturday. The six-day trading (one-day weekend) was in effect before 1998 in the Taiwan foreign exchange market. In addition, an “alternative two-day” weekend was implemented during 1998–2000.2 Since 2001, the two-day weekend has been adopted in the Taiwan financial market in order to align with the global practice. Thus, the change of trading-day regimes in the Taiwan foreign exchange market provides us a unique opportunity to examine if the pattern of day-of-the-week effect changes. Second, we are the first to study and employ the stochastic dominance (SD) theory to examine day-of-the-week effect in the foreign exchange market. An important and useful feature of SD is that it is distribution-free, allowing the distribution of returns to be continuous, discrete or any mix of the two. It does not require the normality assumption, which is obviously inappropriate for exchange rate. In addition, the advantage of SD imposes fewer restrictive assumptions regarding the investor utility function. For example, the first-degree stochastic dominance (FSD) makes only one assumption on investor utility that investors prefer more returns to less. Thus, the investor utility function can be concave, linear, or convex. In contrast, many asset pricing models, like the well-known capital asset pricing model (CAPM), are derived on the assumption that the investor utility function must be concave or on the normality assumption of returns. Finally, our methodology is enticing as it allows part of investors’ money to be invested in the foreign currency (risky assets) and part of their money to be invested in the risk-free assets.3 Earlier studies use the regression model to test whether the day-of-the-week effect exists in the foreign exchange market (e.g., Aydoğan and Booth, 2003 and Yamori and Kurihara, 2004). Our methodology utilizing SD theory enables investors to have a better tool for assets allocation. That is, investors can decide an optimal proportion of investment in risky assets and risk-free assets. Eight currencies, Australia dollar, Canada dollar, Euro, Hong Kong dollar, Japan yen, Swiss franc, United Kingdom pound and the US dollar, are examined in this study during the 1992–2006 period. The exchange rates of eight currencies against New Taiwan dollar are referred as AUD, CAD, EUR, HKD, JPY, SWF, UKP and USD, respectively. Our study offers two interesting results. First, we demonstrate that higher returns appear on the first three days of the week (Monday through Wednesday) for the six-day trading regime covering the 1992–1997 period (one-day weekend) for all currencies. It seems no clear pattern for day-of-the-week effect over 1998–2000. During recent five-day trading regime from 2001 to 2006 period (two-day weekend), the returns of six currencies on Monday through Wednesday are also higher than the other days except the EUR and UKP. These findings indicate there are day-of-the-week effects in the Taiwan foreign exchange market and higher returns generally appear on the first three days of the week across different trading-day regimes. Our results are similar to earlier literature, such as McFarland et al., 1982, So, 1987 and Cornett et al., 1995. But, it obviously differs from the results of Yamori and Kurihara (2004) which have documented that the day-of-the-week effect disappears in the New York foreign exchange market after 1990s. The second important finding is that allocating part of investors’ assets in risk-free assets can help distinguish the relative performance among weekdays for all currencies, which is also supported by the simulation test. This finding can enable investors to better design their international investment strategy. The rest of this paper is organized as follows: Section 2 introduces the foreign exchange market in Taiwan. Section 3 describes the data and methodology. Section 4 presents and explains the empirical results. The final section is the conclusions.

This study employs the distribution-free stochastic dominance theory to examine the day-of-the-week effect of eight daily exchange rates in the Taiwan foreign exchange market for the period, 1992–2006. Our study period covers three trading regimes: six-trading days, alternative trading days, and five-trading days. Our findings can be summarized as follows. First, we observe the day-of-the week effect across different trading-day regimes in our sample period. During the first trading regime, 1992–1997 (one-day weekend) and the third trading regime, 2001–2006 period (two-day weekend), higher returns appear on the first three days of the week (Monday through Wednesday) for almost all currencies, implying that the pattern of the day-of-the-week effect is not influenced by the change of trading days during the week. Second, Yamori and Kurihara (2004) document the day-of-the-week effect exists in the 1980s for some currencies, which later disappear for almost all currencies in the 1990s in the New York foreign exchange market. The day-of-week effect persists in the Taiwan foreign exchange market even in recent years. This persistence may be explained by the immaturity or inefficiency of the Taiwan foreign exchange market, despite the fact that capital flows have been gradually liberalized from 1990s. Finally, our important finding is that allocating part of investors’ assets in risk-free assets can help distinguish the relative performance among weekdays for the various currencies, which is also supported by the simulation test. This finding enables investors to structure their investment strategies for better assets allocation.