Overnight Returns, Daytime Reversals, and Future Stock Returns: The Risk of Investing in a Tug of War With Noise Traders

57 Pages Posted: 9 Feb 2019

See all articles by Ferhat Akbas

Ferhat Akbas

University of Illinois at Chicago

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Chao Jiang

University of South Carolina - Department of Finance

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Date Written: January 1, 2019

Abstract

A high frequency of positive overnight returns followed by negative trading day reversals during a month suggests a persistent daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and other investors during the day. We show that a more persistent tug of war predicts higher future returns, both for individual stocks and the overall market. Our results are stronger in situations where it is riskier to trade against noise traders. Additional tests further support the conclusion that investors demand a premium for trading stocks that are more prone to this “noise trader risk.”

Keywords: Noise Trader Risk, Opening Price, Overnight Return, Heterogeneous Investors, Retail Traders

JEL Classification: D82, G14, G19

Suggested Citation

Akbas, Ferhat and Boehmer, Ekkehart and Jiang, Chao and Koch, Paul D., Overnight Returns, Daytime Reversals, and Future Stock Returns: The Risk of Investing in a Tug of War With Noise Traders (January 1, 2019). Available at SSRN: https://ssrn.com/abstract= or http://dx.doi.org/10.2139/ssrn.3324880

Ferhat Akbas

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60076
United States

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Chao Jiang (Contact Author)

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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