Dispersion of Opinions, Limits to Arbitrage, and Overnight Returns

64 Pages Posted: 10 Aug 2008 Last revised: 21 Jun 2009

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Laura A. Tuttle

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Ying Zhang

Missouri State University - College of Business Administration

Date Written: June 2009

Abstract

Using nine years of intraday data for the largest 3,000 U.S. stocks, we find a strong tendency for positive returns during the overnight period followed by reversals during the subsequent trading day. This behavior is driven by an opening price that is high relative to intraday prices. Consistent with the theory of Miller (1977) and other disagreement models, we find this behavior is limited to stocks with high dispersion of opinions measured near the daily open, as well as over the entire trading day. Furthermore, the magnitude of these overnight returns and trading day reversals is progressively greater among finer subsamples of stocks subject to greater limits to arbitrage, embodied in more binding short sale constraints and high transaction costs.

Keywords: market efficiency, limits to arbitrage, short sale restrictions, institutional ownership, transaction costs, dispersion of opinions, disagreement, overpricing

JEL Classification: D82, G14, G19

Suggested Citation

Berkman, Henk and Koch, Paul D. and Tuttle, Laura A. and Zhang, Ying, Dispersion of Opinions, Limits to Arbitrage, and Overnight Returns (June 2009). Available at SSRN: https://ssrn.com/abstract=1214564 or http://dx.doi.org/10.2139/ssrn.1214564

Henk Berkman (Contact Author)

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

Laura A. Tuttle

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
United States
202-551-6544 (Phone)

Ying Zhang

Missouri State University - College of Business Administration ( email )

United States

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