Since the advent of electronic trading in the mid-1990s, U.S. equities have traded (almost) twenty-four hours a day through equity index futures. This allows new information to be incorporated continuously into asset prices, yet we show that almost 100 percent of the U.S. equity premium is earned during a one-hour window between 2:00 a.m. and 3:00 a.m. (EST), which we dub the “overnight drift.” We study explanations for this finding within a framework à la Grossman and Miller (1988) and derive testable predictions linking dealer inventory shocks to high-frequency return predictability. Consistent with the predictions of the model, we document a strong negative relationship between end–of-day order imbalance, arising from market sell-offs, and the overnight drift occurring at the opening of European financial markets. Further, we show that in recent years dealers have increasingly offloaded inventory shocks at the opening of Asian markets, and we exploit a natural experiment based on daylight saving time to show that Asian offloading shifts by one hour between summer and winter.
|Udgiver||Centre for Economic Policy Research|
|Status||Udgivet - mar. 2020|
|Navn||Centre for Economic Policy Research. Discussion Papers|
- Equity risk
- Overnight returns
- Intraday immediacy
- Inventory management