Lunch Effect in the U.S. Stock Market Indices

Abstract

The Lunch Effect is a well-known anomaly in the U.S. stock market, characterized by increased stock prices following the lunch break. This article explores the Lunch Effect, examining evidence that supports and contradicts its existence. Proponents of the Lunch Effect suggest that investor behavior, specifically a shift towards algorithmic trading during lunch hours, contributes to the price increase.

Background. The U.S. stock market operates with several daily trading sessions, including pre-market, regular hours, and after-hours. During regular trading hours, algorithms and buy/sell programs execute trades according to pre-programmed parameters.

Methods. The authors analyzed intra-day stock market data from May 6, 2010, to May 2024, obtained from Yahoo Finance and Finram. They adjusted the data for splits, dividends, and opening prices.

Results. The study found that the previously observed overnight effect has diminished significantly. However, the Lunch Effect persists, with markets exhibiting an upward trend from 11 AM to 2 PM, followed by consolidation.

Discussion. The authors posit that the Lunch Effect remains a factor, albeit weaker than before. They attribute this effect to human traders taking lunch breaks and algorithmic trading activity.

Keywords: market timing, own-research, seasonality