Volume Shocks and Overnight Returns

Abstract

We study the effect of intraday volume shocks on stock returns during overnight and intraday periods. We discover a significant positive relationship between volume shocks and subsequent overnight returns, while no such effect exists during the next intraday session. This pattern is consistent regardless of the market capitalization of stocks. Well-known asset pricing risk factors and common explanations that associate abnormal trading volume with investor attention and cost of capital cannot account for the distinct intraday and overnight patterns we observe. We employ linear and machine learning models to forecast volume shocks and construct portfolios that monetize the positive correlation between volume shocks and overnight stock returns. Our approach addresses the issue that volume shock is only known after the close auction when one trades stocks; we show that this issue of non-tradability does not explain the observed relationship between volume shock and overnight stock returns.

Keywords: Trading volume, overnight returns, machine learning