Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open

40 Pages Posted: 16 Jun 2010 Last revised: 14 Mar 2011

Henk Berkman

University of Auckland - Business School

Paul D. Koch

University of Kansas - Finance Area

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: March 2011

Abstract

Using 13 years of intraday data for U.S. stocks, we find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. We find this temporary price inflation at the open is concentrated among stocks that have recently attracted the attention of retail investors, and these high attention stocks have high levels of net retail buying at the start of the trading day. In addition, we document that the sensitivity of opening prices to retail investor attention is more pronounced for stocks that are difficult to value and costly to arbitrage, and is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high attention stocks near the open frequently exceed the effective half spread.

Keywords: market efficiency, attention, sentiment, retail investors, transaction costs, short sale

JEL Classification: D82, G14, G19

Suggested Citation

Berkman, Henk and Koch, Paul D. and Tuttle, Laura A. and Zhang, Ying, Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open (March 2011). Available at SSRN: https://ssrn.com/abstract=1625495 or http://dx.doi.org/10.2139/ssrn.1625495

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

University of Kansas - Finance Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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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