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Early To Rise: When Opening Stock Returns Are Higher Than Daily Returns?

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  • KUDRYAVTSEV Andrey

    (The Max Stern Academic College of Emek Yezreel, Israel)

Abstract

In present study, I explore intraday behavior of stock prices. In particular, I try to shed light on the relationship between the widely-documented U-shaped intraday pattern of stock returns (e.g., Wood et al. (1985), Jain and Joh (1988), Pagano et al. (2008)) and the well-known concept of stock price overreaction resulting in potentially profitable investment strategies based on short-term price reversals (e.g., Zarowin (1989), Cox and Peterson (1994), Park (1995), Nam et al. (2001)). Employing the stocks making up the Dow Jones Industrial Index, I document that for the majority of stocks, open-to-close returns tend to be significantly lower, and in most cases negative, if on that respective day their opening returns are higher than the average or median opening return on the stocks in the sample. That is, relatively high opening stock returns may serve an indication for subsequent intraday price reversals and for even more pronounced intraday U-shaped return pattern. Based on these findings, I suggest two versions of a daily-adjusted reversal-based investment strategy yielding significantly higher returns and with significantly less risk, than the strategies involving passively holding the index or an equally-weighted portfolio of stocks.

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File URL: http://eccsf.ulbsibiu.ro/RePEc/blg/journl/735kudryavtsev.pdf
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Bibliographic Info

Article provided by Lucian Blaga University of Sibiu, Faculty of Economic Sciences in its journal Studies in Business and Economics.

Volume (Year): 7 (2012)
Issue (Month): 3 (December)
Pages: 58-73

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Handle: RePEc:blg:journl:v:7:y:2012:i:3:p:58-73

Contact details of provider:
Postal: Lucian Blaga University of Sibiu, Faculty of Economic Sciences Dumbravii Avenue, No 17, postal code 550324, Sibiu, Romania
Phone: 004 0269 210375
Fax: 004 0269 210375
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Web page: http://economice.ulbsibiu.ro/
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Related research

Keywords: Intraday Stock Returns; Opening Returns; Open-to-Close Returns; Overreaction; Risk and Return; Stock Price Reversals;

References

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  1. Perry, Philip R., 1985. "Portfolio Serial Correlation and Nonsynchronous Trading," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 517-523, December.
  2. Nam, Kiseok & Pyun, Chong Soo & Avard, Stephen L., 2001. "Asymmetric reverting behavior of short-horizon stock returns: An evidence of stock market overreaction," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 807-824, April.
  3. Lo, Andrew W. & Craig MacKinlay, A., 1990. "An econometric analysis of nonsynchronous trading," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 181-211.
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  17. Rhee, S. Ghon & Wang, Chi-Jeng, 1997. "The bid-ask bounce effect and the spread size effect: Evidence from the Taiwan stock market," Pacific-Basin Finance Journal, Elsevier, vol. 5(2), pages 231-258, June.
  18. Gerety, Mason S & Mulherin, J Harold, 1994. "Price Formation on Stock Exchanges: The Evolution of Trading within the Day," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 609-29.
  19. Park, Jinwoo, 1995. "A Market Microstructure Explanation for Predictable Variations in Stock Returns following Large Price Changes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(02), pages 241-256, June.
  20. Dong-Hyun Ahn & Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 2002. "Partial Adjustment or Stale Prices? Implications from Stock Index and Futures Return Autocorrelations," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 655-689, March.
  21. Cox, Don R & Peterson, David R, 1994. " Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance," Journal of Finance, American Finance Association, vol. 49(1), pages 255-67, March.
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