Overnight Returns as a Market Timing Strategy

49 Pages Posted: 9 Oct 2020 Last revised: 10 Mar 2021

See all articles by Michael A. Kelly

Michael A. Kelly

Lafayette College - Department of Economics

Date Written: March 1, 2020

Abstract

Risk-adjusted overnight returns greatly exceed risk-adjusted daytime returns. Researchers use Jensen's alpha or the Fama-French three factor model for risk adjustment and use Fama-MacBeth regressions to test the estimated betas' predictivity. However, owning stocks only during the day or night is a market timing strategy. Using the non-linear factors proposed by Merton (1981) and Goetzmann et al. (2000), we show that the close-to-open strategy has negative market timing ability (measured by a non-linear regressor) with a positive selectivity alpha (measured by alpha), while the open-to-close strategy has the opposite. We also find that alpha is significant in down market periods.

Keywords: Anomalies, Asset pricing, CAPM, Day-night, intraday returns, overnight returns

JEL Classification: D53, G11, G12, G14

Suggested Citation

Kelly, Michael A., Overnight Returns as a Market Timing Strategy (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3692068 or http://dx.doi.org/10.2139/ssrn.3692068

Michael A. Kelly (Contact Author)

Lafayette College - Department of Economics ( email )

Simon Center
Room 204
Easton, PA 18042
United States
610-330-5313 (Phone)

HOME PAGE: http://www.lafayette.edu

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