The Overnight Drift
Lars C. Larsen and
No 14462, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Since the advent of electronic trading in the mid 1990's, U.S. equities have traded (almost) 24 hours a day through equity index futures. This allows new information to be incorporated continuously into asset prices, yet, we show that almost 100% of the U.S equity premium is earned during a 1-hour window between 2:00 a.m. and 3:00 a.m. (ET) which we dub the "overnight drift". We study explanations for this finding within a framework a la Grossman and Miller (1988) and derive testable predictions linking dealer inventory shocks to high-frequency return predictability. Consistent with the predictions of the model, we document a strong negative relationship between end of day order imbalance, arising from market sell offs, and the overnight drift occurring at the opening of European financial markets. Further, we show that in recent years dealers have increasingly offloaded inventory shocks at the opening of Asian markets and exploit a natural experiment based on daylight savings time to show that Asian offloading shifts by one hour between summer and winter.
Keywords: Equity Risk; Intraday Immediacy; Inventory management; Overnight Returns (search for similar items in EconPapers)
JEL-codes: G13 G14 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mst, nep-ore and nep-sea
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Working Paper: The Overnight Drift (2020)
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