Overnight returns and investor sentiment: Further evidence from the Taiwan stock market

Abstract

This study reexamines the relationship between overnight returns and investor sentiment—a finding documented by Aboody et al. (2018, JFQA)—on the Taiwan Stock Exchange (TWSE). We aim to verify whether the overnight returns on the TWSE are reflective of investor sentiment and clarify how the trading activities of different investor types affect the patterns of overnight returns. We show that overnight returns cause short-term persistence and long-term return reversal on the TWSE, both of which are driven by investor sentiment. In addition, the percentage of retail trading enhances the patterns of overnight returns. A high individual trading volume ratio raises the tendency of short-term overnight return persistence. Our findings provide further support for the validity of overnight returns in measuring investor sentiment. When overnight returns fail to work as a valid sentiment proxy in many non-US markets, their success on the TWSE suggests that the connection with the US market, the preference of investors for chasing information, and the structure of market participants are likely to be the most important determinants of whether they are reflective of investor sentiment.