Is The Risk of The Opening Price Gap Priced?

Gustavo Araujo, Claudio Barbedo, Hugo Costa and Aziz Baruque

No 644, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The objective of this work is to analyze whether the risk of differences between the closing price and the opening price of the subsequent day, the opening price gap rate, is priced in the Brazilian stock market. This inquiry stems from the recognition that an investor is impacted by the volatility of these gaps. Long and Short strategies are simulated, entailing long positions in stocks with higher overnight volatility and short positions on those with lower overnight volatility. The one-year volatility of daily gap returns is utilized to define the portfolio for the subsequent year, and to categorize the strategy into long and short positions. The results reveal that the strategy generates positive abnormal returns across all models (CAPM, Fama-French Three Factor Model and Fama-French Extended Model), indicating that the gap risk is not priced in the Brazilian market. The strategy yields an annualized abnormal return exceeding 13%.

Date: 2026-04
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