Authors: Nina Boyarchenko, Lars C. Larsen, and Paul Whelan
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Staff Reports
The Overnight Drift
Number 917
February 2020 Revised August 2022
February 2020 Revised August 2022
JEL classification: G13, G14, G15
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.
Author Disclosure Statement(s)
Nina Boyarchenko
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Lars C. Larsen
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Paul Whelan
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Lars C. Larsen
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Paul Whelan
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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