What Drives Momentum and Reversal? Evidence from Day and Night Signals

Abstract

Overnight returns are mostly driven by news, whereas intraday returns are mostly driven by investors' trading. We use this fact to test theories of momentum and reversal with a sample of intraday and overnight returns spanning 1926 to 2019. Portfolios formed on past intraday returns display short-term reversal and momentum without long-term reversal. In contrast, portfolios formed on past overnight returns display only long-term reversal. These results are consistent with underreaction theories of momentum, where investors underreact to the information conveyed by the trades of other investors.

Keywords: Momentum, Reversal, Intraday, Overnight, Underreaction

JEL Classification: G10