Question

Situation:

Many people believe that there is a "Friday effect" in the stock market. They do not necessarily spell out exactly what they mean by this, but there is a sense that the stock prices tend to be lower on Fridays than on other days.

Action:

Because stock prices are readily available on the web, it should be easy to test this hypothesis empirically.

1.            Before collecting data and running test, however, you must decide exactly which hypotheses you want to test because there are several possibilities. Formulate at least two sets of null/alternative hypotheses.

2.            Decide on criteria to support or refute your hypothesis.

3.            Collect a year's worth of data points (52 Fridays and the following Mondays) from the stock market and perform the 2 Sample T - test analysis.

4.            Conduct the test at different significance levels and discuss your findings. Can you conclude that there is a statistically significant Friday effect in the stock market?

Answer 1

Answer 1

1. Null Hypothesis: Stock prices on friday are same as that on any other weekday.

H0 Mean of friday = Mean on Weekday

1. Alternate Hypothesis: Stock prices on friday are different from that on any other weekday.

HA Mean of friday =/= Mean on Weekday

2. Null Hypothesis: Stock prices on friday are same or more as compared to any other weekday.

H0 Mean of friday >= Mean on Weekday

2. Alternate Hypothesis: Stock prices on friday are less from that on any other weekday.

H0 Mean of friday < Mean on Weekday

Answer 2

Support for 1

The first sentence of the question tells us about the friday effect. It does not state whether it is more or less. IT only tells it is different from other weekdays. Null hypothesis includes = because we want to prove that it is not equal to and thus it forms our alternate hypothesis.

Support for 2

The last sentence describes or hints us about friday effect that stock price is less on friday than on other days. Stock market is open on weekdays and so weekdays are taken. So in null hypothesis we have taken greater than or equal to sign as our alternate hypothesis comes with less than sign which we want to prove.