Overnight Returns, Daytime Reversals, and Future Stock Returns
62 Pages Posted: 9 Feb 2019
Date Written: January 1, 2020
A higher frequency of positive overnight returns followed by negative trading day reversals during a month suggests a more persistent daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and arbitrageurs during the day. We show that a more persistent daily tug of war predicts higher future returns, both for individual stocks and the overall market. Additional tests support the conclusion that, in a more persistent tug of war, daytime arbitrageurs are more likely to discount the possibility that positive news arrives overnight, and thus overcorrect the persistent upward overnight price pressure.
Keywords: Opening price, overnight return, daytime reversal, heterogeneous investors, retail traders, arbitrageurs.
JEL Classification: D82, G14, G19
Suggested Citation: Suggested Citation