Return Extrapolation and Day/Night Effects

57 Pages Posted: 9 Aug 2022

See all articles by Christopher S. Jones

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Sungjune Pyun

National University of Singapore (NUS) - Department of Finance; National University of Singapore (NUS) - Risk Management Institute

Tong Wang

University of Oklahoma, Price College of Business

Date Written: August 4, 2022

Abstract

We propose that differences between overnight and daytime returns are the result of return extrapolation. After high daytime returns, morning order imbalances are high in the first 15 minutes of regular trading the next day, which is consistent with higher overnight returns. The effect is asymmetric, with positive returns having larger response than negative returns, and it is stronger in more overpriced stocks and stocks with more retail interest. At the portfolio level, extrapolative effects can explain most of the cross-sectional variation in the "tug of war" between overnight and daytime returns. Extrapolative trading is also consistent with the upward sloping relation between market beta and average overnight returns.

Keywords: extrapolation, overnight returns

JEL Classification: G12

Suggested Citation

Jones, Christopher S. and Pyun, Sungjune and Wang, Tong, Return Extrapolation and Day/Night Effects (August 4, 2022). Available at SSRN: https://ssrn.com/abstract=4181093 or http://dx.doi.org/10.2139/ssrn.4181093

Christopher S. Jones (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Sungjune Pyun

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

National University of Singapore (NUS) - Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Tong Wang

University of Oklahoma, Price College of Business ( email )

307 West Brooks, Room 205A
Norman, OK 73019
United States
2132357250 (Phone)

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