There are several explanations for this phenomena:
* The largest moves in price occur after quarterly earnings announcements, which are released after-hours. Same with other material announcements.
* Prices are more volatile after-hours because there are fewer market participants. Because the order book is smaller, the same sized trade will have a larger effect on price after-hours compared to during trading hours.
* Some traders at hedge funds are limited on how much $ they can hold overnight by risk management. This is because there is less liquidity and it is difficult to unload if a position implodes overnight. To reduce risk, they sell end of day, and buy back after market open.
* For the above two reasons, holding overnight confers more risk, which will be rewarded by the market with higher returns.
* (personal speculation): The "positive returns for holding after-hours" effect reflects the general trend of the stock market. Stocks have trended upwards for the past several decades, so the effect is currently positive. If stocks were to trend downwards for several years, I'd expect this the after-hours effect to also be negative. I have not backtested this.
Add to all of these that the return is uninvestable, so the market cannot eliminate the arbitrage.
1016x over 30 years is a gain of less than 0.001% per trading day. You would have spent much more than this through fees and market impact to buy and sell the stock each day, especially at any real volume.
The market is full of uninvestable or tiny capacity trades like this. A reliable pattern gets created by trading flows like the ones described in other replies, and it doesn't get arbed out because it is uninvestable or has tiny capacity.
Imagine how many HFT algorithms are out there trying to exploit every micro trend to the extreme. I am not in that game, but I can imagine all the things I would try, and I know there are really smart people and obviously a ton of money invested in it. Trying to find something simple that consistently makes money for a long time would be nearly impossible because the patterns would be found and exploited by many until they scrubbed out any potential gains. (But then again if someone did find it they wouldn't share). So you need to get novel and pour all sorts of external data into your models to have any edge. Something this simple just wouldn't be a thing. But it is still interesting to understand.
Algo trading teams are indeed research shops that have to continually replace their strategies. Often times success is less about the cleverness of a prediction than clever engineering (technical or contractual!) that makes a known pattern investable. Or else about being earlier to identify emerging, short lived patterns so that you can profit from more of their lifecycle. Teams make long term investments in technologies and strategies that help them do these things repeatably.
I think at this point the traditional stock market has so much algorithmic trading going on that making your own algorithm that can consistently win is basically impossible. But there are other less popular markets that don't receive the same attention.
It depends. Sure an obscure crypto or betting exchange does not have many competitors, but that's not because no one cared, but because even with perfect strategy it's going to be hard to make $$ if daily volume is 10k. How much can you reasonably extract?
Conversely, traditional stock markets is where relatively unsophisticated players do multi-million transactions all the time. This is where the money is. You might need to fight for it or it might be handed over on a silver plate by some redditors.
I don't think too many people would suggest algorithmic trading as a retirement strategy. Nor is investing in a single company a great plan, regardless of their dividend stability. I'm a confirmed Boglehead myself, but I do enjoy playing games with my lunch money. Options, crypto, or just individual stocks if I like the company. And yeah, it does help if they are a Dividend Aristocrat if I plan to hold that stock for any length of time.
I've also considered trying some algorithmic trading at lesser known markets, because it is interesting.
It seems like a HFT trader could arbitrage this pattern out by just taking it into account while planning other trades. If a HFT firm makes millions of trades a day, then they could just slightly bias their buys/sells by considering the .1% gain from holding overnight.
Night is generally just longer too, so you're taking on more risk regardless of liquidity as well (more time holding the stock, more time for good/bad news, on average you get rewarded for that risk)
That’s a massive assumption. How efficient and rational does the stock market seem to you? With most of it driven by index funds and 401k contributions and even wall street traders jumping on bandwagons.
Risk reduces alpha. Risk doesn’t increase alpha. Yes obviously in a perfectly rational environment there would be a “need” to reward necessary risk but the market definitely does not need to in this case. More than enough idiots will hold their positions overnight without any upside.
Phenomenon is singular, phenomena is plural. The same is true for other words of similar form (criterion, etc.).
I have an unusual sensitivity to societal grammar, spelling, pronunciation patterns vs the literal rules of language, and only recently has it been clear that most people who use those words use them very consistently incorrectly. This seems to have changed since I was a child.
For all the talk about how the Internet's information educates us, we still need to acknowledge that people need to seek out and be receptive to that information.
Haven't you explained too much? Your robust explanation should hold true in 1990, 2000, 2010 but the phenomenon had a discrete beginning in 2009 (and arguably a smaller inflection point in 2002) per the graph.
Since the article is not very informative, and it's a real rabbit hole to try to track this stuff down across all the linked articles etc. and as I don't even really care about stocks and the market, I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading?
Each stock is listed at some exchange. There are companies that have stock listed at several exchanges, but the stock tickers have a postfix that identifies the exchange they are listed on so you can still distinguish them. And for such companies, one of those exchanges is the 'primary exchange' of the stock. Normally the vast majority of trades of a stock happen on its primary exchange.
So, since each stock has a primary exchange, the 'day' and 'night' refer to the time zone of that particular exchange.
Simply put, day means if you bought on the market open and sold at the close. Night means if you bought on the close and sold on the open.
The implication seems to be stocks jump at the open then trail off during the day. Thing is most of this is only obvious in retrospect and by the time you realize it the opportunity is gone because it’s now widely known.
As someone who doesn't know much about stocks and trading - is it normal to keep stocks for only <12h? All comments talk about morning -> evening or evening -> morning, what about morning -> morning, or even longer timespans?
Or is this the difference between trading and investing?
You can keep stocks only for milliseconds if you wish... (see e.g. https://en.wikipedia.org/wiki/High-frequency_trading). And for the less extreme version there's day trading (https://en.wikipedia.org/wiki/Day_trading) where you sell all your positions before the market closes (basically you try to speculate on intra-day changes of the stocks, so you keep them from minutes to hours).
> Or is this the difference between trading and investing?
Probably, or rather between purely speculating and investing?
I don't think trading is the same as speculating. To me, speculating is making big directional bets, eg "I think oil is underpriced right now, so i am going to buy loads of oil futures, then hope that in three months i can sell them at a much higher price". Whereas trading is usually much shorter-term and less directional, eg "I think French government bonds are overpriced relative to German government bonds right now, so i am going to get short French bond futures, buy an equivalent amount of German cash bonds, then hope that in a couple of days i can unwind that for a profit". And investing is "people like to drink Coca-Cola, so i will buy shares in the Coca-Cola company".
But i don't think there are hard and fast definitions.
Yeah, some people use "trading" and "speculating" in the exactly opposite way than you do. Some equate speculating and trading entirely: a trader is someone who buys something not for personal use but for further resale, and of course they hope to sell at a higher price, duh.
I believe when people talk about trading and investing the main difference is the time horizon.
See Swing Trading, Day Trading etc. for shorter-term time-horizons. Keeping stocks only intra-day would be Day Trading (generally).
There are lots of people on the internet who say they can 'teach' you day-trading. Don't do it unless you have a very high risk tolerance, i.e. are willing to lose it all and walk away. Even then there's probably better things to do with your money.
> There are lots of people on the internet who say they can 'teach' you day-trading. Don't do it unless you have a very high risk tolerance,
Yeah I know, watched a ton of videos documenting the shady things these finance-gurus have done over the years. For a couple of months I was involved in a signal-trading group (I knew them personally), but I never had a good feeling about it and pulled my money without loosing much of it.
After playing around with crypto I've come to the conclusion that a savings and retirements account is probably the better solution for me, even though the interest is laughable. At least the money is safe as long as the global financial system doesn't totally collapse.
In the end I don't care enough about having more money to venture into investing etc., and I'm too scared of being conned by someone.
No, it’s definitely not normal although I don’t have figures on what the average hold time is for any given issue. Since a lot of stock is purchased as automatic 401k contributions a lot of stock is held for many years. I believe this article is just using this to illustrate an unusual price pattern that emerged for some time where stocks opened higher than the close for a significant number of days over this timeframe.
It’s just parasitism on top of the legitimate activities of the market (capital allocation).
People who benefit from it (market administrators, traders) like to pretend it increases the liquidity of the market and that it’s a good thing. How you appreciate this argument generally directly depends of how much you stand to gain from it being accepted.
Yeah, yeah, I know the drill lower fees, faster price discovery, better liquidity. You will have a hard time convincing me any of these benefits are worth tolerating the damage speculations wreak like clockwork every ten years or so but I know I am on the losing side of this battle.
Intraday means you buy some stock - in some exchange - in the morning at the open price in the opening auction and sell the stock in the evening at the close price in the closing auction.
Overnight means you take the other side: buy at the close and sell at the open. (This is a bit more complex conceptually as you would never settle the trades and that may be problematic regarding dividends and other corporate actions.)
All the trades would settle, but you would need extra cash or a margin account. In a cash account, there's rules about selling stocks before the purchase funds have settled.
The move to T+2 settlement last decade reduces the requirements, and T+1 later this decade would reduce them further.
Dividends and corporate actions aren't a big deal. Those all have announcement dates and record dates. If you hold the shares at the close of market on the record date, you will get the dividend or other proceeds. So if you always manage to buy at close, you will always get those benefits. The only complication would be if you want to oppose a merger and have standing to sue; or I guess if you were an injured party in any other shareholder lawsuit. Lots of tax paperwork too.
Could you please explain this complexity? ELI5 even?
You never settle the trades?
Dividends etc?
Hmm maybe I am 5...
Edit: ok yep so I guess what if they repeated the analysis leaving some time around open/close for chance of trades to settle, would the effect disappear or would this chance beef the key factor for the reported gain?
Settlement is when you actually own the stock you bought and the seller actually gets your money. That happens a couple of days after the trade. In the meantime it’s just “as if” but not quite and that has practical consequences. For example you can’t take your money out of the brokerage account until it’s really there.
> I am only left with one question which I did not find answered anywhere yet - what exactly does day and night mean in the context of the whole world trading?
While we're at it, I have a related question: why do the exchanges even "open" and "close"? Surely in our globalized digital economy, it's not just "day" and "night" that are meaningless, but the very concept of "opening hours" itself.
Historically, it's because exchanges were real places that people went to, and it would be expensive and pointless to run them all night.
These days, there is a trend towards opening hours getting longer (eg [1]).
But there is still value to limited hours. Off the top of my head:
1. Liquidity gets concentrated. If there is a fixed amount of end-user demand (inflows into pension funds, oil production to hedge), then shorter hours means sort of 'denser' trading, which in turn means more quantity on the books, tighter prices, and better efficiency.
2. Trading is still done under human direction, or at least under human supervision, so shorter hours are less demanding on staffing. It's possible to run a productive soybean trading desk with two people at the moment. You'd need six people if trading was round the clock, and those people aren't cheap. Or else desks don't trade the whole day, and they miss out on opportunities, and other participants get less competition, and so worse efficiency.
3. Closing the market gives participants time to do various kinds of admin related to trading. Options markets close earlier than their corresponding futures markets, so that options market makers can get their position cleanly hedged. Bond markets close before repo desk traders go to the pub, so that bond trades can get financed.
If anyone is wondering, this is not a joke. Some of the trading systems I've worked on were designed to be restarted every night. The memory didn't "leak", but was designed this way - preallocate all the memory you could need, and its "freed" when you restart at night.
Because the memory fills up. You pre-allocate a million orders, and send 800k orders a day, leaving only 200k free slots. You're going to run out mid day tomorrow if you don't restart.
Ah, OK. But I would characterize this as an internal allocator that never deallocates. You might as well replace `malloc` and `free` to do the same, and just allocate within the program normally.
Just because you "preallocate" it doesn't mean that you don't implement a poor man's allocator inside the preallocated buffer.
That just sounds like a memory leak with more words. Is the memory reclaimed/reclaimable? No? Ok then it leaked. If the system were able to reclaim the memory from the order, you wouldn't need to restart it. The memory arena strategy doesnt change that.
It's still a fine strategy. One "formal" name for it I've heard is "null garbage collector". It may feel dirty, but it's pragmatic: if the program runs in cycles with well-defined starts and ends, restarting it reclaims all memory and brings the program to a well-known state.
I buy all the groceries I need for a week. That's realistically achievable (cost, cargo capacity of my vehicle, storage capacity at home, etc.).
I buy all the groceries I need from now until the end of time. That's not realistically achievable, from any perspective.
Allocating all the memory you need for a day is realistically achievable. Allocating all the memory you need until the end of time is not realistically achievable.
The grocery analogy doesn't work. When you're "done" with a particular "grocery", it's gone. It doesn't exist anymore. When you're done using a block of memory, you can use it again and again and again. Assuming you remembered to free it. Groceries work more like write-once memory.
It's a "leak" only if it creates problems for you, such as slowdown or risk of running out of memory. In this case, there are no such problems - memory use and execution time are both bounded. The memory gets automatically reclaimed when the program restarts (that's the job of the OS, and if it fails at it, you can always reboot the machine).
It's a perfectly fine way of engineering a system.
There's also a variant of this that's been used on missiles - basically, you put enough RAM on the weapon to guarantee it'll hit its target or run out of fuel before running out of memory.
I once was tracking a white whale of a memory leak. Along the way I was able to optimize memory usage of the leaked objects. So I got to the point where I thought maybe the leak was caused by simultaneous read, update, and delete operations on a single key, but by then I'd improved memory usage such that weekly, rather than nightly restarts were needed. The futures markets at the time were 24/7 but with a maintenance period on the weekends, so my boss just told me to leave it and let the restarts garbage collect.
The real pros generalized this concept into so-called "supervision trees" - building your system as a hierarchy, where whenever a program misbehaves in any way, it gets restarted by a higher-level program, which itself will also be restarted if it can't get a handle on things, recursively to the top of hierarchy.
> You'd need six people if trading was round the clock, and those people aren't cheap.
That's not a good argument. If there were more openings for that kind of position, more people would apply, and average remunerations would get lower.
The real problem is that this would effectively distribute wealth (and access to wealth) more widely, and the ruling classes can't have that as a matter of principle.
Hiring six traders instead of two does not strike me as a form of wealth redistribution effective enough to warrant the attention of the all-powerful Illuminati, although i'll ask them next time i see them just in case.
It's not a hypothesis, it's how the mass-market works. Take computation: as demand rose and rose, prices fell and fell. And yes, the education and career systems have commonalities with manufacturing.
In computation, the supply rose much faster (faster chips, cloud computing) than demand until the advent of widespread ML. And I haven't noticed the price falling much in the last few years.
I don't know if it's the reason, but I understand that a lot of market-moving news is released after close so that participants have time to digest it and decide whether their positions still make sense. The next day's opening auction will deal with the increased volatility better (see the story about the NYSE "forgetting" to hold the opening auction and the resulting chaos)
Nobody just presses "start" on their trading algo and takes a nap the rest of the day. Even market makers, who have a simple and easily-automatable trading strategy, have a team of traders constantly tweaking the parameters to their algos.
I guess they could hire a second and third shift, but they also could have done that back when stocks were traded on paper and over the phone. The will just isn't there.
It's not an anachronism. Liquid markets behave verrry differently from illiquid markets.
In liquid markets, "AAPL is $141.23" makes sense. It means that you can expect to buy and sell almost as much AAPL as you want at very close to that price because there are loads of buyers and sellers near that price. You can pretend that AAPL stocks have a price like a lamp at home depot: "I would like 2 AAPL please" is a safe thing to say.
In illiquid markets, "AAPL is $141.23" does not make sense. "I would like 2 AAPL please" is not safe at all. There are bids and offers, but not necessarily a lot of them, and not necessarily near each other. If you were to place the "2 AAPL please" order (or something related like "$500 of AAPL please"), you might find that you have purchased 1 AAPL for $141.23 and 1 AAPL for $299.57 because there was a big gap in the order book. The price abstraction completely breaks down and you have to "haggle" with bids and offers directly.
"Ok," you might say, "liquidity is important, but surely we can just let the bots provide liquidity at night?" The problem is that markets are adversarial and bots can't really deal with "attacks" as well as humans (or at least the humans staking the money don't trust them to). There is all sorts of craziness that a market-making bot can't handle, and if you encourage people to rely exclusively on market-making bots then they can be taken advantage of (oh no, AAPL is down 50%, better sell, wtf, price shot right back up, rage).
It's safer and smarter to just have everyone agree on convenient blocks of time to crowd into the market. During those periods of time the market can be assumed liquid. The price abstraction works.
"But I'm a big boy and I want to live in the danger zone, let me trade at night!" Go right ahead. It's not only possible, it's readily available and people do it all the time. You can probably request some degree of after-hours trading from your brokerage right this minute. It's usually pretty easy -- usually you just have to ask for them to enable permission and promise that you know what a limit order is. Usually market orders are disabled, too, because they know that plenty of people would hit "accept," shoot themselves in the foot, and complain anyway :)
Bots wouldn't be required to provide liquidity during night hours. People living on the other side of the world will do just fine. We live in a global world now and people can buy stocks wherever using the internet, not just in the physical exchange like in the old days.
...and they can trade after hours just like anyone else who jumps through the minor hoops, yet crazy price action after hours is still an observational facts.
> Exchanges are also closed on various bank holidays which are different in every country
You can't settle on a bank holiday, because the banks are closed. If you trade on a day you can't settle, you're going to have two days of trading settling on the same day later, which is going to be weird.
Yup, that's why I think that stories about the benefits of having HFTs providing micro-second liquidity are bunk. Even without holidays and weekends, large stock exchanges only operate 7 hours per day, with a 17 hour gap of non-liquidity every day.
Actually, it’s mostly down to the computers now. Having downtime is advantageous to the primary customers of the stock market. If you have the same “off and on” times as your competitors you can ensure your operations are structured in such a way that you don’t have to deal with a whole class of systemic risks, no need to roll out up’s to FPGA powered acceleration devices live where the smallest mistakes can cost money for every second they are wrong let alone if they are broken … to more mundane things like being able to reprocess the data trading data and analyse performance vs other prediction models… effectively the downtime is for the high frequency traders and the algorithm traders and all the players paying for direct access to the stock market for their computer systems… it’s effective a digital cage match from bell ring to closing time and it’s in the best interests of all the competitors to only have to fight the same 8-12 hours in the cage, lest it becomes a much more expensive 24/7 war of attrition.
In the US the stock market officially opens at 9:30 and closes at 16:00 NY time every day. The day return is the return from the first trade (the official opening price but it would take too long to explain the the difference) at or after 9:30 to the last trade at or before 16:00 (the official closing price) and the night return is the return from the closing price to the opening price the next trading day.
You can trade SPX (which is what SPY is based on) via IBKR after hours. SPX is only options though. They may have extended that to SPY as well now though, since SPY now has daily expiring options.
There's also S&P (ES), NASDAQ (NQ) and other futures. They trade 23/6, closing at 5pm EST on Friday and reopen on Sunday at 6pm EST. Otherwise, they're trading 23 hours a day, except between 5pm and 6pm EST Mon-Fri
Who/what is able to trade equities specifically (like SPY the ETF, or any of its underlying components like AAPL, META, etc.) pre-market and/or post-market?
Anyone that uses IBKR as their broker can trade what I mentioned above pre/post market (and some cases overnight). IBKR is a retail broker. I use them, for example. Most brokers in the US let you trade common stock before and after market hours, even ones like webull. That said, not every broker has the same pre/post market trading hours, but the better ones let you trade almost all day and night depending on the underlying equity.
Enough to dedicate an 60-90mins of my day to scalping one or two trades and then go about my day as usual. I have a consistent strategy I backtested and follow. I don't see a trade that meets my criteria, then I close my broker. Most people that day trade don't do that and that's why they lose money.
I've been trading for a while and don't suggest to others to trade futures[0]. It's essentially highly leveraged stock, but less risk than options.
Any investor can. If the option is not available to you, contact your brokerage to ask about it. Many (most?) brokerages require signing a waiver confirming that you understand the additional risk posed by trading in low-volume pre- and post-market yours.
YOu're graphing a random walk with a single black swan event (2008 crash).
A more honest graph would just have the day/night delta mapped out, not integrated in.
Indeed. I pulled the data and mostly reproduced the results when starting on Jan 1, 1990 (I got 1/20 of a penny for day trading, but "only" somewhere in the $600-650 range for overnight trading, depending on the choice of end date. Close enough to proceed with additional analysis, IMO.
If instead I pick my starting point as Jan 1, 2012, I see $1.15 for day trading vs $2.24 for overnight trading. (Note that there was again another black swan event in Feb-March 2020, before which point day trading was actually doing better than overnight trading.)
Tracking deltas (well, day-over-day multipliers) as you suggest since 1990 shows that the two shapes are qualitatively more similar (although day trading is more volatile):
- 0.1st percentile: day trading: 0.803 vs overnight trading: 0.871
- 1st percentile: day trading: 0.932 vs overnight trading: 0.960
- 99th percentile: day trading: 1.059 vs overnight trading: 1.052
- 99.9th percentile: day trading: 1.189 vs overnight trading: 1.222
To say it is a random walk is confusing a model of reality with reality.
Totally agree with the other poster though. You can pretty much prove whatever you want in the market depending on the start date and window size.
I would think the driving factor is after market earnings releases, expectations for those releases and how many there randomly happen to be during the window in question.
If I understand the graph correctly, it is showing cumulative returns where the bulk of the returns happened in just a few days around 2008. It would be a lot more useful to see the relative intraday returns but the graph would look a lot less dramatic.
Good luck replicating this in sample. Open and closing auctions are going to crush your strategy from a cost and slippage perspective. In addition you should be looking at risk adjusted return. The overnight volatility is way higher than the intraday. Are you being paid for each unit of risk you're taking?
There's a few (often contradictory) explanations for this.
My favourite is: Things that can be sold quickly are safer (because you can sell them if bad news comes out) so are worth less than less liquid things, like holding stocks when the market is closed. So by holding stocks overnight you are being payed for taking on the risk by those selling them before closing.
So the stock goes up overnight because of the risk that... the stock will go down overnight?
Surely if the risk was real, the stock would actually go down sometimes, and cancel out the "free lunch", and on average there would be no effect to explain!
The risk is real, but many people are risk averse enough to be prepared to take a small loss [or lesser profit] to avoid risk of a bigger loss in basically every market anywhere - that's why insurance is a thing!
And you could see an effect in some individual stocks of traders whose strategies rely on reacting to stuff fast allowing traders whose strategies don't to profit by risking holding onto the stock for at least several hours, even if the average effect was zero because a few other stocks did have bad news overnight giving the bagholders of those stocks big losses...
"Risk" as markets consider it is more about volatility. The higher the volatility, the more likely you are to make (or lose) money. People being as they are, volatility is usually perceived negatively and it causes people to be less willing to pay for volatile assets.
Look at the lengths people will go to for a nonvolatile risk-free return in bonds or bank accounts - but they know they can only lose a few percent if things go wrong (eg. interest rate rises).
If you take that volatility risk, you are rewarded for it with higher returns, on average :)
Sometimes it does go down - I think the linked article says you need to be buying and selling billions of dollars of stocks for a long time to make the profit.
But another reason is that people are selling it before close, which lowers the price then buy again on open - which increases the price. Many day traders will close out their trades at the end of the day and start again the next day so they can't loose anything overnight, although they can't gain anything either - they're willing to loose that for the peace of mind.
That would depend on what the stock is, right? If you are holding 1 stock of spy you are better off holding overnight than holding cash overnight. Look at the 5 year chart for cash vs spy, holding spy beats holding cash.
_if_ this actually holds... (1) "overnight" is longer than intraday: the NYSE on which AIG is traded is only open for 27% of the day (930-1600). That's not enough to explain the effect, though.
(2) many (most?) large companies announce financial results after market close. Assuming that's one of the long-term drivers of change, it makes sense there's more net movement when you include those.
So am I understanding this correctly that massive algorithms are shorting stocks first thing in the morning - like in the first few seconds of trading - and then consolidating their positions before close. They basically can do this regularly essentially guaranteeing returns that the rest of us aren't able to take advantage of. And the SEC's lack of enforcement has allowed this practice to continue for the past decade or more. Is this the "strategy"?
More or less the opposite: stock sold off cheaply in the evening got sold for more in the morning. Probably algorithms involved in selling, but more likely they were prepared to take lower returns to not risk holding AIG overnight rather than as some sort of market manipulation strategy
But the main factor in the divergence in that chart in 2008-9 - as one of the comments points out - is that AIG announced a lot of bad news during the financial crisis during the daytime but never collapsed overnight.
On a tangential note, I've been meaning to pursue a silly hypothesis that you could buy cryptocurrency low on mondays and sell high on weekends, because that's when recreational gamblers gamble most - an extension of pandemic-bubble thinking. Just wondering if anybody ever graphed it out...
> In general this strategy is profitable, both for the full sample and for individual years, but in most cases the results are not statistically different from the random trading case, and therefore they do not represent evidence of market inefficiency.
> They say that stocks go down during the day and up at night
There are lots of things "they say" about the markets, "sell in May and go away" is another famous one.
Most of it pure BS, some of it is half-true, and the rest are sayings that date back to the "good old days" pre-HFT, Hedge Funds and leveraged trading.
Frankly "stocks go up at night" is a ludicrous proposition.
Feel free to give it a go, but corporate actions, corporate RNS, world events ....."events dear boy, events" will very happily shit on you from a great height if you think you're going to make money through short-term overnight holding.
"Time in the market is better than timing the market" is about the only true saying that remains.
This one, too, turns out to be incorrect. The source of this is mostly due to the fact that, in fact, if you average out over a longer time horizon, your annualized returns do in fact average out. However, what people miss is that fact that this annualization is being compounded over that entire time as well, so small disturbances to it end up having quite a substantial impact on that end result. The only REAL form of diversification is asset class, not time.
> If you invested $1 in AIG at the start of 1990 and received only intraday returns
This is the problem with all stock market related articles: they all hinge on if you had done this or that. They never tell you I actually performed these two strategies and here are the results.
It would be quite simple to perform such experiments but it seems that it is either never done or is perhaps kept confidential.
In this case I'd expect the costs of trading in and out of the position everyday to be prohibitive. Even if your broker doesn't charge you anything (or you are a prop trading desk with zero trading fees), just paying the spread every day would add up quickly over time. It might not be possible to perform such an experiment at all in the real world.
It's still interesting from an academic standpoint though, if only to show how long term pricing inefficiencies can persist over long time periods even in otherwise efficient markets.
The divergence in AIG occurred to a large extent in 2010. However, this effect is present for most stocks and the indices as well and has existed for pretty much as long as we have reliable data without survivorship and lookahead bias.
Is it surprising to you that the effect was larger for AIG around 2010? As AIG was going bankrupt and the common stock holders were effectively getting wiped out, individuals were willing to hold AIG during the day to play crazy intra-day volatility but unwilling to hold AIG overnight because most announcements around restructuring were happening overnight.
Of course at the time short sales on a list of stocks including AIG were forbidden. So even if you ignore the fact that most day traders etc prefer to play things on the long side, you have the issue that they couldn't play the short side even if they wanted to.
A large trading firm, particularly one that had the capability to trade cheaply enough to take advantage of this effect would never do this simply because 50%+ of the return of a single stock is determined by the return of a common market factor. If you take a position in a long only stock portfolio, you may own many stocks but statistically, particularly if the portfolio is only held overnight, it's a large bet on the direction of the market plus some noise. So you are taking a massive binary bet that is going to go wrong anytime the market opens down. This is why most high Sharpe ratio equity trading strategies involve short selling even though equities have a strong upward bias. If you eliminate the effect of the market factor, you have a portfolio that is made up many statistically independent bets.
For example, if you take a bet that is expected to make +/-1000 dollars with an equity portfolio, and it's long only, it's like tossing one coin to determine whether you make 500-700 dollars of the 1000 and then tossing coins repeatedly to determine the outcome of the remaining 300-500 dollars one dollar at a time. If the portfolio was market neutral, i.e. long and short in equal amounts, it's like you toss the coin 1000 times, each coin toss determining only 1 dollar of the outcome. If you believe the coin is biased even somewhat in your favor, as it usually is when you are trading a high quality strategy, the second option is far better.
Given the kind of risk-adjusted returns achievable by a firm that could trade cheaply enough to take advantage of this effect by other means, even using relatively simple well-known strategies, doing this would hurt their risk adjusted return and the returns they could generate on their risk capital. So the odds that there is a large long-lived firm doing this to mark their book and causing this effect is likely close to 0.
Others have mentioned several explanations for the effect. To this I will add one more, which I think is at least, if not more likely than the rest. Retail day-traders, some of whom are larger than people realize have a long bias, ie they are far more likely to hold a stock long than short sell it and they tend to close out their positions at the end of every day.
Seems like the authors have an axe to grind more than a point to make. The paper reads like the kind of certainty a completely uninformed but (markets are made up of evil people) true-believing crusader has. To me it seems like the kind of situation where someone doesn't yet know enough about a subject to know how little they know, in this case buttressed up by the broken credentialing system we call our education system.
This has to be too simple to be the reason, but I immediately thought it's because exchange opening hours are less than the closed hours each day, and since stocks generally go up, more of the increase should happen at night on average.
I'm still convinced the market is fake and they keep making up more rules and ways to make money because its a Ponzy Scheme ready to collapse. Filter money from the retail to the elite few. Don't get me wrong some people make money but its very far and few between and don't think for a moment they won't come after your 401ks for "liquidity"
There is no real regulation.
-Market Manipulation happens all the time.
-Large institutions, Hedge Funds, and MM can make the market
do what ever they want (within reason and time).
-Cellar Boxing is real.
-Latter Attacks are real.
-Placing fake buy and sell order.
-PFOF is a scam.
-Waving your friends Billion $ margin
-Using Fake funds as collateral to beat margin
-Internalizing orders.
-Synthetic shares...
-Family Institutions
-Self Reporting
-Fail To Delivers can go on for years.
-Manipulation real value by placing sell orders on LIT
exchanges and buy orders in "Dark Pools"
-0 fraction reserve lending.
-Hide position is Swaps.. Which are not reported...
* The largest moves in price occur after quarterly earnings announcements, which are released after-hours. Same with other material announcements.
* Prices are more volatile after-hours because there are fewer market participants. Because the order book is smaller, the same sized trade will have a larger effect on price after-hours compared to during trading hours.
* Some traders at hedge funds are limited on how much $ they can hold overnight by risk management. This is because there is less liquidity and it is difficult to unload if a position implodes overnight. To reduce risk, they sell end of day, and buy back after market open.
* For the above two reasons, holding overnight confers more risk, which will be rewarded by the market with higher returns.
* (personal speculation): The "positive returns for holding after-hours" effect reflects the general trend of the stock market. Stocks have trended upwards for the past several decades, so the effect is currently positive. If stocks were to trend downwards for several years, I'd expect this the after-hours effect to also be negative. I have not backtested this.