Overnight Reversal and the Asymmetric Reaction to News

40 Pages Posted: 28 Dec 2022

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Stefan Salbrechter

Deka Investment GmbH; Vienna University of Technology

Date Written: December 20, 2022


News released overnight has a significant directional impact on individual shares’ opening prices, i.e., the market tends to open higher (lower) when news with positive (negative) sentiment is published. However, the market opening is not fully efficient due to over- or underreactions of market participants to the news, resulting in a predictable pattern of returns on the following trading day. In particular, we find that large daytime returns followed by overnight news with strong sentiment lead to a predictable return reversal during the subsequent trading day. This predictable reversal is present independent of the polarity of the news sentiment. Without overnight news, large previous-day returns only have marginal predictive power.

Keywords: Overnight Returns, Return Predictability, Text Mining, Sentiment Analysis, Machine Learning, BERT

JEL Classification: G10, G11, G12, G14

Suggested Citation

Dangl, Thomas and Salbrechter, Stefan, Overnight Reversal and the Asymmetric Reaction to News (December 20, 2022). Available at SSRN: https://ssrn.com/abstract=4307675 or http://dx.doi.org/10.2139/ssrn.4307675

Thomas Dangl

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040

Stefan Salbrechter (Contact Author)

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325

Vienna University of Technology ( email )

Karlsplatz 13

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