New evidence on the Monday seasonal in stock returns

Equity derivatives and the institutionalization of equity markets affect the Monday seasonal. The seasonal in the Standard and Poor's 500 (S&P) declines significantly over 1962-93. This decline is positively related to the ratio of institutional to individual trading volume. In contrast, the seasonal for small stocks does not decline and is unaffected by institutional versus individual trading. Higher trading costs sustain the seasonal in small stocks, and unlike the S&P, these costs are not lower for institutions than for individuals. Futures minus spot S&P returns exhibit a reverse seasonal. Informed traders use the less costly market to exploit the seasonal.