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The Overnight Drift

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This paper documents that U.S. equity returns are large and positive during the opening hours of European markets. These returns are pervasive, economically large, and highly statistically significant. Consistent with models of inventory risk, we demonstrate a strong relationship with order imbalances at the close of the preceding U.S. trading day. Rationalizing unconditionally positive “overnight drift” returns, we uncover an asymmetric reaction to demand shocks: market selloffs generate robust positive overnight reversals, while reversals following market rallies are much more modest. We argue that demand shock asymmetry can arise in inventory management models with time-varying dealer risk-bearing capacity.

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  • 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 August 2022.
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    1. Kerssenfischer, Mark & Schmeling, Maik, 2024. "What moves markets?," Journal of Monetary Economics, Elsevier, vol. 145(C).

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    More about this item

    Keywords

    overnight returns; immediacy; inventory risk; volatility risk;
    All these keywords.

    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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