Marketability As Real Options: The Cross Sectional Variation of Overnight Returns in China

59 Pages Posted: 23 Mar 2020 Last revised: 15 Apr 2020

See all articles by Haorui Bai

Haorui Bai

Tsinghua University; Tsinghua University, PBC School of Finance

Date Written: January 11, 2020

Abstract

This paper provides new empirical evidence for the way in which non-marketability affects asset prices in financial markets. Critically, the results rely on the unique trading friction "T+1" rule in the Chinese A-share market. Consistent with the predictions derived from Longstaff (1995) and option pricing theory, overnight returns of A-share stocks are negative on average, decreasing with asset volatilities, volatility risks, and jump risks. The upper bound of the marketability option is restricted by the average holding period of the asset and is smaller when there are substitutional marketability instruments. Thus, the marketability-option-related variables could explain the negative overnight returns of illiquidity, short-term reversal, and momentum.

Keywords: Option pricing, T+1 constraint, Marketability, Overnight returns, Short-sale constraint, High-frequency Data

JEL Classification: G12, G18, N25, O16

Suggested Citation

Bai, Haorui and Bai, Haorui, Marketability As Real Options: The Cross Sectional Variation of Overnight Returns in China (January 11, 2020). Available at SSRN: https://ssrn.com/abstract=3513658 or http://dx.doi.org/10.2139/ssrn.3513658

Haorui Bai (Contact Author)

Tsinghua University, PBC School of Finance ( email )

No. 43, Chengdu Road
Beijing 100083
China

Tsinghua University ( email )

Beijing, 100084
China

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