New York: Paying attention to overnight returns — between the time the stock market closes and re-opens the next day — may help investors develop profitable trading strategies, according to a new study.
This trading outside of the standard trading hours, uses electronic communication networks to match potential buyers and sellers without using a stock exchange.
The study found that overnight market activity provides a goldmine of information about investor sentiment at the firm level, or pertaining to specific stocks rather than the broader market.
“Overnight returns allow us to capture what individual investors think and expect at the firm level,” said Omri Even Tov, Assistant Professor at the University of California – Berkeley.
After measuring how much returns moved after the market closed, the researchers found that in the short term, up to 12 weeks, prices continued to trend in the same direction, what financiers called price “persistence.”
The effect was even stronger for firms that are typically more difficult to value.
High overnight returns underperformed while those with low overnight returns outperformed.
The 12-month return on a strategy of buying and selling stocks based on overnight returns yielded a premium of 7.4 percentage points.
“People want to know the extent to which prices are efficient. Our measure is useful for investors by giving them a new way to determine whether stocks are overpriced or underpriced, which can help them take better decisions,” Even Tov noted.
For the study, forthcoming in the Journal of Financial and Quantitative Analysis, the team analysed overnight returns in the US stock market between July 1992 and December 2013. In addition to short-term persistence, they also studied how stocks performed overnight over the longer term, or 12 months.
The findings likely reflect investor sentiment because private investors are more likely to place orders when the market is closed, the researchers said
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