Do intraday U.S. stock returns still tend to reverse preceding overnight returns as found in prior research? In their August 2018 paper entitled “Overnight Return, the Invisible Hand Behind The Intraday Return? A Retrospective”, Ben Branch and Aixin Ma revisit prior research on the relationship between overnight and intraday returns of U.S. stocks. Specifically, they relate average intraday stock returns to preceding average overnight returns based on: (1) whether average overnight returns are positive or negative; and, (2) by ranked fourths (quartiles) of average overnight returns. They perform a separate regression analysis to isolate correlation effects among overnight, intraday and one-leg lagged overnight and intraday returns. Using daily open-to-close and close-to-open returns for a broad sample of U.S. stocks during January 2011 through December 2017, they find that:
- The correlation between average intraday and overnight stock returns is still negative, but weaker than in prior research. Average overnight (intraday) return is 0.044% (-0.018%) in recent data.
- Smaller stocks drive persistence of the effect, which is now absent among S&P 500 stocks.
- Across all stocks, the stronger the overnight return, the stronger the intraday return reversal.
- Regression results confirm that the overnight-intraday reversal effect has faded overall and now indicate a positive relationship between overnight and intraday returns for S&P 500 stocks.
- In the recent sample, stock returns are more tightly coupled with the market return than in prior research.
In summary, evidence indicates that reversal between overnight and intraday U.S. stock returns persists only among stocks for which it is most difficult to exploit.
Cautions regarding findings include:
- The recent sample period is short in terms of variety of market conditions.
- Findings are statistical and not trade-oriented. Exploitation of overnight-intraday reversal would entail two-way trading frictions across many stocks (for reliability).
- As noted, concentration of any residual overnight-intraday reversal among smaller stocks may confound exploitation.
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