Report

The Overnight Drift

Abstract: 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.

Keywords: overnight returns; immediacy; inventory risk; volatility risk;

JEL Classification: G13; G14; G15;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2020-02-01

Number: 917

Note: Revised August 2022.