Short Selling And The Weekend Effect Evidence From Malaysia Stock Market 2007 - 2017

Weekend effect is a complex phenomenon that requires much research in order to understand the dynamic factor affecting it. The short selling mechanism in the Malaysia stock market provides a unique opportunity to investigating weekend effect where some stocks are allowed for short selling while others are not allowed for short selling. Thus this paper has examined daily stock returns of shortable and nonshortable stock in Malaysia stock market for the period 14 August 2007 to 26 January 2017. The research is conducted by applying GARCH and EGARCH model because of heteroscedasticity has been found by ARCH-LM test which showed that the weekend effect is present in shortable stock return. No evidence of weekend effect was found for nonshortable stock. These results indicate that short selling of stock maybe one of the factors that affecting the weekend effect in Malaysia stock market. This is because short sellers face a greater risk if they hold their short positions over the weekend. So they tend to close their short positions on Friday which cause the buying pressure to increase before the weekend and reestablish their positions on next first day of trading which result in increased selling pressure that will cause the stock price decreases and thus contribute to the weekend effect. This study also suggests that Malaysia stock market is weak-form inefficient as a result of the existence of weekend effects.