Staff Reports
The Overnight Drift
Number 917
February 2020 Revised September 2021

JEL classification: G13, G14, G15

Authors: Nina Boyarchenko, Lars C. Larsen, and Paul Whelan

This paper documents large positive returns to holding U.S. equity futures overnight during the opening hours of European markets. Consistent with models of inventory risk and demand for immediacy, we demonstrate a strong relationship with order imbalances arising at the close of trade from the previous U.S intraday session. Rationalizing unconditionally positive “overnight drift” returns, we uncover a strong asymmetric reaction to demand shocks: market sell-offs generate robust positive overnight reversals while reversals following market rallies are much more modest. We argue that this demand shock asymmetry is consistent with time-variation in dealer risk bearing capacity.

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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.

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