The Overnight Drift
98 Pages Posted: 2 Mar 2020 Last revised: 16 Aug 2022
Date Written: February 1, 2020
This paper documents that U.S. equity returns are large and positive during the opening hours of European markets. These returns are pervasive, economically large, and highly statistically significant. Consistent with models of inventory risk, we demonstrate a strong relationship with order imbalances at the close of the preceding U.S. trading day. Rationalizing unconditionally positive “overnight drift” returns, we uncover an asymmetric reaction to demand shocks: market selloffs generate robust positive overnight reversals, while reversals following market rallies are much more modest. We argue that demand shock asymmetry can arise in inventory management models with time-varying dealer risk-bearing capacity.
Keywords: overnight returns, immediacy, inventory risk, volatility risk
JEL Classification: G13, G14, G15
Suggested Citation: Suggested Citation