Asset Pricing: A Tale of Night and Day
41 Pages Posted: 15 Feb 2018
Date Written: February 3, 2018
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.
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