The Overnight Drift

64 Pages Posted: 2 Mar 2020

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Lars Christian Larsen

Copenhagen Business School

Paul Whelan

Copenhagen Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2020

Abstract

Since the advent of electronic trading in the mid-1990s, U.S. equities have traded (almost) twenty-four hours a day through equity index futures. This allows new information to be incorporated continuously into asset prices, yet we show that almost 100 percent of the U.S. equity premium is earned during a one-hour window between 2:00 a.m. and 3:00 a.m. (EST), which we dub the “overnight drift.” We study explanations for this finding within a framework à la Grossman and Miller (1988) and derive testable predictions linking dealer inventory shocks to high-frequency return predictability. Consistent with the predictions of the model, we document a strong negative relationship between end–of-day order imbalance, arising from market sell-offs, and the overnight drift occurring at the opening of European financial markets. Further, we show that in recent years dealers have increasingly offloaded inventory shocks at the opening of Asian markets, and we exploit a natural experiment based on daylight saving time to show that Asian offloading shifts by one hour between summer and winter.

Keywords: equity risk, overnight returns, intraday immediacy, inventory management

JEL Classification: G13, G14, G15

Suggested Citation

Boyarchenko, Nina and Larsen, Lars Christian and Whelan, Paul, The Overnight Drift (February 1, 2020). FRB of New York Staff Report No. 917, February 2020. Available at SSRN: https://ssrn.com/abstract=3546173 or http://dx.doi.org/10.2139/ssrn.3546173

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

Lars Christian Larsen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Paul Whelan

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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