IDEAS home Printed from
   My bibliography  Save this paper

Overnight Stock Returns and Time-varying Correlations


  • Pandey, Ajay


Time-varying correlation of the stock market returns across countries in the context of international investments has been well researched in the literature in last few years. It has also been recognized that there is “volatility effect in correlation”, as the stock return correlations tend to rise on high-volatility days. Recent research has however, highlighted the pitfalls of using sample correlation for comparison, particularly when the conditional volatility across samples is not same. It has been shown that the sample correlation of two independent random variables is expected to rise when the conditional volatility of the variables is high and vice-versa, even if the unconditional correlation between them is constant. Empirically, it has been long well known that the overnight (closed-market) stock returns are less volatile than the open-market returns. Making use of this regularity, we test whether the stock returns correlation are higher during trading or non-trading hours. Using five years’ daily returns of 30 constituent stocks of Sensitive Index (Sensex) of The Stock Exchange, Mumbai, we find that almost all the pair-wise closed market stock return correlations are higher than the open market correlations despite lower volatility of the closed market returns. These results are further reinforced after using the univariate and bivariate conditional volatility models. Higher closed market stock return correlations are consistent with the possibility that information, which arrives during non-trading, is more on common factors. Arrival of information on common factors would imply higher stock return correlations during non-trading hours. This has implication for managing risks associated with any stock portfolio, as the diversification benefits might be over-estimated for overnight positions and under-estimated during trading hours if daily close-to-close returns are used to estimate variance-covariance matrix.

Suggested Citation

  • Pandey, Ajay, 2003. "Overnight Stock Returns and Time-varying Correlations," IIMA Working Papers WP2003-09-05, Indian Institute of Management Ahmedabad, Research and Publication Department.
  • Handle: RePEc:iim:iimawp:wp01779

    Download full text from publisher

    File URL:
    File Function: English Version
    Download Restriction: no

    References listed on IDEAS

    1. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
    2. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
    3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iim:iimawp:wp01779. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.