Heterogeneous liquidity providers and night-minus-day return predictability

Zhongjin Lu, Steven Malliaris and Zhongling Qin

Journal of Financial Economics, 2023, vol. 148, issue 3, 175-200

Abstract: We present and test a model to understand the puzzling fact that characteristics-sorted stock portfolios tend to earn opposite-signed overnight and intraday expected returns. Heterogeneous arbitrageurs – “fast” arbitrageurs with informational advantages and “slow” arbitrageurs with low inventory costs – compete to determine the price of liquidity. High information asymmetry around market open allows fast arbitrageurs to demand large price deviations for absorbing order imbalances, as cream-skimming risk discourages competition from slow arbitrageurs. Despite persistent order imbalances, these deviations attenuate when cream-skimming risk subsides, leading to opposite-signed overnight and intraday returns. Our model identifies novel determinants that empirically explain substantial variations in predictable overnight-minus-intraday returns.

Keywords: Fast and slow arbitrageurs; Return predictability; Overnight and intraday returns; Endogenous limited participation; Liquidity provision (search for similar items in EconPapers)
JEL-codes: G12 G14 G23 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:148:y:2023:i:3:p:175-200

DOI: 10.1016/j.jfineco.2023.03.002

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