A One-factor Model for Expected Night-minus-day Stock Returns

52 Pages Posted: 28 May 2021 Last revised: 8 Sep 2021

See all articles by Zhongjin Lu

Zhongjin Lu

University of Georgia - Department of Finance

Zhongling Qin

Auburn University - Department of Finance

Date Written: September 7, 2021

Abstract

We propose a one-factor model for expected night-minus-day (NMD) returns and use it to examine the economic forces underlying NMD return predictabilities. Our model successfully prices a large set of NMD portfolios with a cross-sectional R2 around 80%. Consistent with the absence of near-arbitrage opportunities, the pricing factor has substantial exposure to the dominant common risks in the NMD return space. Finally, we link the pricing factor to retail order imbalances at the market open and the required returns from liquidity provision. Our findings point to a pricing equilibrium in which liquidity providers require compensation for accommodating sentiment-driven demand.

Keywords: Night-minus-day returns, liquidity provision, limits-of-arbitrage, retail trading

JEL Classification: G12, G14, G23

Suggested Citation

Lu, Zhongjin and Qin, Zhongling, A One-factor Model for Expected Night-minus-day Stock Returns (September 7, 2021). Available at SSRN: https://ssrn.com/abstract=3854046 or http://dx.doi.org/10.2139/ssrn.3854046

Zhongjin Lu (Contact Author)

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6254
United States

Zhongling Qin

Auburn University - Department of Finance ( email )

Harbert College of Business
Auburn, AL 36849
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
283
Abstract Views
1,092
rank
147,748
PlumX Metrics