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The Overnight Drift

Author

Listed:
  • Nina Boyarchenko
  • Lars C Larsen
  • Paul Whelan
  • Stefano Giglio

Abstract

This paper documents that U.S. equity returns are large and positive during the opening hours of European markets. These returns are pervasive and highly economically and statistically significant. Consistent with models of inventory risk, we demonstrate a strong relationship with order imbalances at the close of the preceding U.S. trading day. Rationalizing unconditionally positive “overnight drift” returns, we uncover an asymmetric reaction to demand shocks: market sell-offs generate robust positive overnight reversals, while reversals following market rallies are much more modest. We argue that demand shock asymmetry can arise in inventory management models with time-varying market maker risk-bearing capacity.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Nina Boyarchenko & Lars C Larsen & Paul Whelan & Stefano Giglio, 2023. "The Overnight Drift," The Review of Financial Studies, Society for Financial Studies, vol. 36(9), pages 3502-3547.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:9:p:3502-3547.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad020
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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