A Tale of One Day: Morning Momentum, Afternoon Reversal

Abstract

We document the opposite predictive signals in the morning and afternoon stock returns. Afternoon returns negatively predict future returns, while morning returns positively predict future returns. The short-term reversal is completely driven by the price movement in the afternoon; momentum is primarily driven by the price movement in the morning. We link this phenomenon to the asymmetric market conditions across the trading hours. The gradual decline in information asymmetry implies that the afternoon market is concentrated with non-informed trading. Price impact in the afternoon is temporary and reverses afterwards. The morning momentum strategy subsumes the alpha of traditional momentum, but not vice versa, and its performance does not exhibit long-term reversal.

Keywords: Intraday returns, Reversal, Momentum, Liquidity provision

JEL Classification: G10, G12