Title : Does Weekend Not Matter in Financial Time Series Model? A Specification Test for Trading Time Hypothesis
Standard financial time series analyses using autoregressive models typically regard the weekend as the term not exist (i.e., trading time hypothesis, TTH) since relevant asset of the model is not traded in the market during weekend. However the weekend may affect to the asset price with two factors of the time discounting and shocks which may arise during weekend as in another weekday. Since the TTH, in fact, assumes these factors do not exist, it is a statistically testable hypothesis. Thus, in this paper, a simple t-test of TTH in an AR(1) model is suggested through introducing a parameter representing the TTH. The Monte Carlo simulations showed that suggested test has a nice size and power for checking the TTH. In an application for the stock price of the United States S&P500 data after 1990, we found the TTH was strongly rejected.
JEL: C53
Key words and phrases: weekend, financial time series, trading time hypothesis, specification test
