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Overnight returns, daytime reversals, and future stock returns

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  • Akbas, Ferhat
  • Boehmer, Ekkehart
  • Jiang, Chao
  • Koch, Paul D.

Abstract

A higher frequency of positive overnight returns followed by negative trading day reversals during a month suggests a more intense daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and arbitrageurs during the day. We show that a more intense daily tug of war predicts higher future returns in the cross section. Additional tests support the conclusion that, in a more intense tug of war, daytime arbitrageurs are more likely to discount the possibility that positive news arrives overnight and thus overcorrect the persistent upward overnight price pressure.

Suggested Citation

  • Akbas, Ferhat & Boehmer, Ekkehart & Jiang, Chao & Koch, Paul D., 2022. "Overnight returns, daytime reversals, and future stock returns," Journal of Financial Economics, Elsevier, vol. 145(3), pages 850-875.
    • Handle: RePEc:eee:jfinec:v:145:y:2022:i:3:p:850-875
    DOI: 10.1016/j.jfineco.2021.09.019
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    Cited by:

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    4. Lin, Chaonan & Chang, Hui-Wen & Chou, Robin K., 2023. "Overnight versus intraday returns of anomalies in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    5. De Rossi, Giuliano & Steliaros, Michael, 2022. "The Shift from Active to Passive and its Effect on Intraday Stock Dynamics," Journal of Banking & Finance, Elsevier, vol. 143(C).
    6. Albers, Stefan, 2023. "The fear of fear in the US stock market: Changing characteristics of the VVIX," Finance Research Letters, Elsevier, vol. 55(PA).
    7. Bai, Fan & Zhang, Yaqi & Chen, Zhonglu & Li, Yan, 2023. "The volatility of daily tug-of-war intensity and stock market returns," Finance Research Letters, Elsevier, vol. 55(PA).
    8. Sreekha Pullaykkodi & Rajesh H. Acharya, 2024. "The Effects of Overnight Events on Daytime Return: A Market Microstructure Analysis of Market Quality," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(3), pages 497-542, September.
    9. Aparna Bhat & Piyush Pandey & S. V. D. Nageswara Rao, 2024. "The asymmetry in day and night option returns: Evidence from an emerging market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(8), pages 1320-1337, August.

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    More about this item

    Keywords

    Overnight return; Daytime reversal; Heterogeneous investors; Retail traders; Arbitrageurs;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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