Asset Pricing: A Tale of Night and Day

41 Pages Posted: 15 Feb 2018  

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: February 3, 2018

Abstract

Stock prices behave very differently with respect to their sensitivity to market risk (beta) when markets are open for trading versus when they are closed. The capital asset pricing model (CAPM) performs poorly overall as beta is weakly related to 24-hour returns. This is driven entirely by trading-day returns, i.e., open-to-close returns are negatively related to beta in the cross section. The CAPM holds overnight when the market is closed. The CAPM holds overnight for the U.S. and internationally for: beta-sorted portfolios, 10 industry and 25 book-to-market portfolios, cash-flow and discount-rate beta-sorted portfolios, and individual stocks. These results are consistent with transitory beta-related price effects at the open and the close.

Suggested Citation

Hendershott, Terrence and Livdan, Dmitry and Rösch, Dominik, Asset Pricing: A Tale of Night and Day (February 3, 2018). 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

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