Overnight Return Momentum: Evidence from European Markets

Abstract

The increased role played by passive equity investors is associated with significant changes in intraday trading patterns. The authors study the dynamics of stock index returns in major European markets during the last 30 minutes before market close and show that they can be predicted by overnight returns. An intraday market-timing strategy the authors formulated to exploit this dynamic delivered sizable economic gains across all markets since 2000. The strategy performance is evident across different subsamples and market conditions, is robust to various implementation assumptions and transaction costs, and cannot be explained by calendar effects or other risk factors. <b>TOPICS:</b>Fundamental equity analysis, exchange-traded funds and applications, developed markets, performance measurement <b>Key Findings</b> ▪ The last half-hour of stock returns in several major European markets can be predicted by overnight returns at the market level. ▪ Intraday market-timing strategies based on overnight returns have delivered sizable economic gains across European countries relative to benchmarks since 2000. ▪ Strategy performance is present after transaction costs and across different subsamples and market conditions, is robust to alternative implementation assumptions, and cannot be explained by calendar effects or other risk factors.