Threshold Overnight Comovement Analysis of Intraday and Overnight Returns

Abstract

This paper presents a novel practical framework for analyzing the interdependency between two stock markets with non-overlapping trading hours. We propose a statistical method to quantify and interpret the lead-lag effects in these asynchronous markets. To account for the lead-lag effects between intraday and overnight returns, we introduce a class of counting processes called the Threshold Overnight Comovement (TOC) processes, that measures the comovement frequency given a strength threshold. We examine the lagged correlations in returns between the S&P500 ETF (SPY) and China large-cap ETF (FXI), including the cross-correlations between intraday and overnight markets. Furthermore, we discuss a class of trading strategies based on lead-lag dynamics.

Keywords: lead-lag effect, asynchronous market, trading strategies, lagged correlation