Returns in trading versus non-trading hours: The difference is day and night

Abstract

Market efficiency implies that the risk-adjusted returns from holding stocks during regular trading hours should be indistinguishable from the risk-adjusted returns from holding stocks outside those hours. We find evidence to the contrary. We use broad-based index exchange-traded funds for our analysis and the Sharpe ratio to compare returns. The magnitude of this effect is startling. For example, the geometric average close-to-open (CO) risk premium (return minus the risk-free rate) of the QQQQ from 1999-2006 was þ 23.7 per cent whereas the average open-to-close risk premium was À23.3 per cent with lower volatility for the CO risk premium. This result has broad implications for when investors should buy and sell broadly diversified portfolios.

Intraday Patterns in FX Returns and Order Flow

“…This is slightly surprising, given the comparatively short trading hours and less promising results found in this market. These studies do not consistently find a strong intraday pattern in equity markets except Kelly and Clark () who find a significantly higher close‐to‐open returns (relative to open to close) for exchange‐traded funds.…”

“…The issue of time‐of‐day effect on returns has received more attention in equity markets (cf., e.g., Harris , Smirlock and Starks , Yadav and Pope , Kelly and Clark ). This is slightly surprising, given the comparatively short trading hours and less promising results found in this market.…”

Option Mispricing around Nontrading Periods

“…The stock market is more volatile over trading periods than over nontrading periods, possibly due to a lower rate of private information revelation (French and Roll (1986)). It is also profoundly less liquid outside of regular trading hours, which should drive a wedge between average returns over trading and nontrading periods (French (1980), Longstaff (1995), Kelly and Clark (2011), Cliff, Cooper, and Gulen (2008)). Prolonged periods of nontrading may also give investors with limited attention a chance to process stale information, whether contained in firm earnings announcements (Dellavigna and Pollet (2009)) or news more generally (Garcia (2013)).…”

Risk Preferences and the Macro Announcement Premium

“…, where f v (W, ξ) and g v (W, ξ) are defined in (44) and (45). It then follows from Lemma 1 that Theorem 3 in Milgrom and Segal [56] applies.…”

“…The previous literature (for example, Kelly and Clark[45] and Polk, Lou, and Skouras[58]) documents that the overnight market return is on average higher than the intraday return in the United States.…”