Asset Pricing: A Tale of Night and Day

65 Pages Posted: 15 Feb 2018 Last revised: 3 Dec 2019

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Dmitry Livdan

University of California, Berkeley

Dominik Rösch

State University of New York at Buffalo - School of Management; Erasmus University - Rotterdam School of Management

Date Written: August 7, 2018

Abstract

The capital asset pricing model (CAPM) performs poorly overall as market risk (beta) is weakly related to 24-hour returns. This is because stock prices behave very differently with respect to their sensitivity to beta when markets are open for trading versus when they are closed. Stock returns are positively related to beta overnight whereas returns are negatively related to beta during the trading day. These day-night relations hold for beta-sorted portfolios and individual stocks in the U.S. and internationally, as well as industry and book-to-market portfolios and cash-flow and discount-rate beta-sorted portfolios. In addition to the change in slope of returns with respect to beta, the implied risk free rate differs significantly between night and day. Consistent with this, returns on U.S. Treasury futures differ significantly between night and day.

Suggested Citation

Hendershott, Terrence J. and Livdan, Dmitry and Rösch, Dominik, Asset Pricing: A Tale of Night and Day (August 7, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3117663 or http://dx.doi.org/10.2139/ssrn.3117663

Terrence J. Hendershott (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Dominik Rösch

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
577
Abstract Views
3,017
rank
49,003
PlumX Metrics