Market Closure and Short-Term Reversal
Posted: 11 Feb 2016
Date Written: November 30, 2015
A strategy that holds daily long and short positions, respectively, in assets with low and high past overnight returns - overnight-intraday reversal strategy - generates for the US stock market an average excess return that is five times larger when compared to a conventional short-term reversal strategy. Our results remain robust to using international stocks as well as equity index, interest rate, commodity, and currency futures. We find that overnight-intraday reversals are consistent with the simulated patterns generated by the continuous-time model with periodic market closures of Hong and Wang (2000). Finally, we demonstrate that only intraday returns matter for the reversal-based liquidity measure of Pastor and Stambaugh (2003).
Keywords: Short-term reversal, Liquidity, Market closure
JEL Classification: G11, G12, G15, G20
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