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Falkenblog reports an interesting finding: All of the stock returns since 1993 are from overnight returns and cross-sectionally, volatility receives a positive overnight risk premium, a negative intraday one:

Another Overnight Return Puzzle

My questions
Is this a known anomaly (At least I have never heard of it)? Is there a name for it? Is this documented in the literature? Is this effect exclusive to the US or also true for Europe and Asia?

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Paying Attention: Overnight Returns and the Hidden Cost of Buying at the Open -- papers.ssrn.com/sol3/papers.cfm?abstract_id=1625495 –  pat Nov 20 '12 at 9:06
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2 Answers

up vote 5 down vote accepted

The study you cited seems to be exaggerating slightly.

1) "An interesting fact of returns is that all of the stock returns since 1993 are from overnight returns" -> This is simply factually incorrect. Why don't you pick the S&P 500 names, you calculate the log returns taking into account price changes from the open to the close, then you do the same for the close-open, you will notice that the chart on that website MUST be incorrect. Returns during the US trading sessions contributed much more returns than indicated in this study.

2) "If you take all the tickers, the top 1000 non-etfs over the past 2 years, and rank them by prior daily volatility, and then look at their overnight returns, you see that volatility is strongly positively correlated with subsequent overnight returns, which then reverse over the next day session." -> Also that does not seem to be accurate (such results with such low p-value). I ran the same study over a small subset of names of different sectors and groups and nowhere find such clean delineation.

I cannot prove my point other than encourage those who want to make sure to simply run their own studies. Its extremely simple to run in R, you even get the price data off several websites free of charge.

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Thank you, Freddy: Would be great if you could post your R code and/or your detailed results here :-) –  vonjd Nov 20 '12 at 8:55
    
I think I leave this as exercise, though its almost trivial. Yahoo and Google among many others provide daily open, high, low, close data. I personally used data from within my own database. –  Matt Wolf Nov 20 '12 at 9:24
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I'm not sure @vonjd needs exercises... The more complete the answer, the more it will attract search results and promote the site! –  SRKX Nov 20 '12 at 22:02
    
@SRKX: Thank you, my thoughts exactly! –  vonjd Nov 21 '12 at 7:43
    
@vonjd, was not meant to be condescending. Apologize if this came across as such. I just patched code together rather than writing up a complete script in that I was not prepared to deliver a solution with code. I indicated clearly in my answer that this an opinion and thought grounded in my own empirical findings rather than proof. –  Matt Wolf Nov 21 '12 at 12:30
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This was documented in this working paper about 6 years ago. I wonder why it was never published... may be some problem with the results.

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