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The Overnight Drift

Author

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  • Nina Boyarchenko
  • Lars C. Larsen

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  • Paul Whelan

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Abstract

We show that nearly 100 percent of the U.S. equity premium is earned over a window around the opening hours of European markets when U.S. cash markets are closed. We explore two potential complementary explanations. First, consistent with predictions from dealer inventory risk models, we find (1) a strong negative link to end-of-day order imbalance; (2) reversals are amplified in periods of high volatility; and (3) in recent years dealers have increasingly offloaded inventory during Asian trading hours. Second, shocks to end-of-day quantities of risk lead to increases in overnight expected returns.

Suggested Citation

  • Nina Boyarchenko & Lars C. Larsen & Paul Whelan, 2020. "The Overnight Drift," Staff Reports 917, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:87539
    Note: Revised July 2020.
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    More about this item

    Keywords

    overnight returns; immediacy; inventory risk; volatility risk;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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