Overnight returns following large price movements

Abstract

Using 5-second data to simulate overnight and intraday trading, we found that a significant price drop in the NASDAQ index has a contagion effect on price downward stocks listed on Taiwan's stock exchange. After the NASDAQ index experienced a 3–4 % drop, traders could profit by trading on stocks falling more than 7 % without hitting floor limits. The positive returns are significantly associated with firms’ characteristics of small size, high prices, high trading volume, and low net profit margin. Upon large price movements, traders could exploit contagion mispricing to make short-term profits.