Article

Asset Pricing: A Tale of Night and Day

Authors:
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

The capital asset pricing model (CAPM) performs poorly overall, as market risk (beta) is weakly related to 24-hour returns. This is because stock prices behave very differently with respect to their sensitivity to beta when markets are open for trading versus when they are closed. Stock returns are positively related to beta overnight, whereas returns are negatively related to beta during the trading day. These day-night relations hold for beta-sorted portfolios and individual stocks in the US and internationally as well as for industry and book-to-market portfolios and cash flow and discount rate beta-sorted portfolios. In addition to the change in slope of returns with respect to beta, the implied risk-free rate differs significantly between night and day. Consistent with this, returns on US Treasury futures differ significantly between night and day.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... Black explained that investors with leverage constraints build their portfolio with higher betas, and hence, stocks with high betas require a relatively low-risk premium. Hendershott et al. (2019) examined the relationship between the returns and beta on the daily data. They determined that the security market line is negative when using the daytime return, i.e. returns from open price to close price of a day, whereas the security market line is positive when using overnight return, i.e. returns from the close price of the previous day to the open price of the preceding day. ...
... Such phenomena are not limited to the US stock market but to other stock markets such as that of the EU. Hendershott et al. (2019) described this phenomenon as a result of speculative behaviors of day traders. These day traders with speculative tendencies short sell low-beta stocks and buy high-beta stocks when the market opens and clears their portfolios before the market closes in the afternoon due to leverage constraints. ...
... Based on the research conducted by Hendershott et al. (2019), this study derives stock market security lines from the overnight and daytime returns in the Korean stock market and confirms the slope difference between the two. In addition, the suitability of beta is reviewed by comparing different beta calculation methods. ...
Article
Purpose The capital asset pricing model has failed to explain the effect of systematic risk (referred to as beta) on actual stock market returns. Accordingly, this study analyzes daily returns by splitting it into overnight and daytime returns. The study analysis empirically confirms a positive relationship between overnight returns and beta and a negative relation between daytime returns and beta. Furthermore, this paper aims to determine that empirical results are mostly the same with three different beta calculations, namely, daily, overnight and daytime returns. The study concludes that beta on overnight returns has the strongest explanatory power and is statistically significant.
... 2 The time-series market frictions/events that have been proposed to explain factor pricing failures (especially the CAPM failure) include, among others, sentiment (Shen et al. (2017)), disagreement (Hong and Sraer (2016)), FOMC announcements (Savor and Wilson (2014)), leverage aversion (Frazzini and Pedersen (2014)), money illusion (Cohen et al. (2005)), or even day and night (Hendershott et al. (2020)). ...
... My results also complement studies on the failure of CAPM and other model-based factors. Previous studies have proposed that several forces are responsible for the failure of factor pricing, such as sentiment (Shen et al. (2017)), disagreement (Hong and Sraer (2016)), FOMC announcements (Savor and Wilson (2014)), leverage aversion (Frazzini and Pedersen (2014)), money illusion (Cohen et al. (2005)), or even day and night (Hendershott et al. (2020)). All of the previous studies analyze factor pricing along a time-series dimension, finding that the CAPM holds or that macro-related factors are priced within certain days-for example, days when the level of sentiment aggregate disagreement is low. ...
Conference Paper
This paper shows that institutional ownership plays an important role in the pricing of a broad set factors. Macro-related (characteristic) factors have significantly larger (smaller) risk premium within stocks held by institutions compared to stocks held by retail investors (66/81 basis points/month). This empirical evidence indicates that "flat" risk premium puzzle can be partly attributed to the tug-of-war between institutions and retail investors. Institutional investors are relatively more rational and demand a premium for bearing systematic risks. Thus, the findings also suggest that macro-related (characteristic) factors are more likely to be a proxy for risk (mispricing).
... 2 The time-series market frictions/events that have been proposed to explain factor pricing failures (especially the CAPM failure) include, among others, sentiment (Shen et al. (2017)), disagreement (Hong and Sraer (2016)), FOMC announcements (Savor and Wilson (2014)), leverage aversion (Frazzini and Pedersen (2014)), money illusion (Cohen et al. (2005)), or even day and night (Hendershott et al. (2020)). ...
... My results also complement studies on the failure of CAPM and other model-based factors. Previous studies have proposed that several forces are responsible for the failure of factor pricing, such as sentiment (Shen et al. (2017)), disagreement (Hong and Sraer (2016)), FOMC announcements (Savor and Wilson (2014)), leverage aversion (Frazzini and Pedersen (2014)), money illusion (Cohen et al. (2005)), or even day and night (Hendershott et al. (2020)). All of the previous studies analyze factor pricing along a time-series dimension, finding that the CAPM holds or that macro-related factors are priced within certain days-for example, days when the level of sentiment aggregate disagreement is low. ...
Preprint
Full-text available
This paper shows that institutional ownership plays an important role in the pricing of a broad set factors. Macro-related (characteristic) factors have significantly larger (smaller) risk premium within stocks held by institutions compared to stocks held by retail investors (66/81 basis points/month). This empirical evidence indicates that "flat" risk premium puzzle can be partly attributed to the tug-of-war between institutions and retail investors. Institutional investors are relatively more rational and demand a premium for bearing systematic risks. Thus, the findings also suggest that macro-related (characteristic) factors are more likely to be a proxy for risk (mispricing).
... In recent years, the literature documents unique characteristics of the components of close-to-close return among different financial markets (Cliff et al., 2008;Cai and Qiu 2009;Kelly and Clark 2011;Aboody et al., 2018;Lou et al., 2019;Muravyev and Ni 2020;Hendershott et al., 2020;Qiao and Dam 2020). Specifically, Cliff et al. (2008) document that strongly positive return at night and negative return during the day holds for individual stocks, equity indexes, and future contracts on equity indexes Cai and Qiu (2009) find that overnight nontrading period returns are significantly higher than both trading period returns and close-to-close daily returns in 23 countries at the stock index level, and they asserted that short selling contributed to this phenomenon. ...
... Muravyev and Ni (2020) decompose option returns into intraday and overnight components, finding a pattern of positive intraday returns and negative overnight returns. Hendershott et al. (2020) find that stock returns are positively related to beta overnight, whereas returns are negatively related to beta during the trading day. Qiao and Dam (2020) document the average overnight return in the Chinese stock market is negative and argue that the "T+1" trading rule contributes significantly to this overnight return puzzle. ...
Article
Full-text available
We verify the existence of firm-level “intraday return vs. overnight return” pattern and overnight-intraday effect of nine financial anomalies of Chinese energy industry stocks of the Chinese stock market. Though energy finance has been an independent research area, we also take Chinese A-shares stocks as samples for empirical analysis to avoid the so-called sample selection bias. Specifically, it verifies that the overnight returns are strongly negative and intraday returns are positive for energy industry stocks, which is totally contrary to the American stock markets. In addition, alphas of the zero-cost strategies based on nine classic financial anomalies are almost earned at night for energy industry stocks. Finally, it is risk-related anomalies that occur overnight for energy industry stocks, while both four risk-related anomalies and two firm characteristics related anomalies occur at night for all A-shares stocks. Our empirical findings based on Chinese financial markets enrich the existing research on the mispricing of financial anomaly and shed a new sight on the asset pricing in energy finance.
... Several studies show a tendency for reversal between successive overnight and daytime trading periods (e.g. Berkman et al., 2012;Bogousslavsky, 2021;Hendershott et al., 2020). Lou et al. (2019) argue this reversal across overnight and daytime trading periods is due to a "tug of war" between two opposite groups of investors: individuals and arbitrageurs who dominate overnight and daytime trading sessions. ...
Article
Akbas et al. (2021) demonstrate that a more intense daily "tug of war" between overnight noise traders and daytime arbitrageurs predicts higher future returns in the US market. We investigate whether the daily tug of war contains predictive information about future stock returns in China. Using the frequency of negative daytime reversals, we find no significant difference in the future returns of stocks with a high versus a low level of intensity in this tug of war. However, we find persistent positive overnight returns followed by daytime reversals of almost similar magnitudes once we decompose the future returns into their overnight and daytime components. Thus, positive returns of the overnight component and negative returns of the daytime component cancel out each other, resulting in no predictive relationship between the daily tug of war and future returns in China.
... Cliff et al. (2008) and Berkman et al. (2012) document that while intraday returns are, on average, negative, overnight returns are positive. Hendershott et al. (2020) show that CAPM holds overnight but not intraday, and attribute intraday deviations from CAPM to noise trading. Bogousslavsky (2021) shows that arbitragers tend to close positions near the end of the trading day since arbitrage is more limited overnight. ...
Article
A press conference (pc) organized by the Federal Open Market Committee (fomc) followed half of the scheduled announcements from 2011 to 2018. We document that excess stock returns are strongly and positively related to their betas on announcement days with a pc. In addition, the cross-sectional dispersion in betas declines substantially on pc days when measured using both daily and intraday return data. These effects are absent on announcement days without a pc. Last, we find that stock-bond correlations are positive (negative) on pc (all other) days and that their variations are related to uncertainty and yield curve information. We discuss implications and possible explanations for our findings.
Article
This study attests to the important role of US midterm elections in asset pricing, even more important than presidential elections. In months following the midterms, equity premiums, mutual fund flows, and real investment growth rates are significantly higher and Treasury premiums are lower. This is consistent with theoretical models relating higher asset prices to lower future discount rates when post-election political uncertainty decreases. The results are robust to different measures of uncertainty. Also, market betas relate positively to the cross section of average returns in post-midterm months, but the relation is flat in other months.
Article
I investigate cross-sectional variation in stock returns over the trading day and overnight to shed light on what drives asset pricing anomalies. Margin requirements are higher overnight, and lending fees are typically charged only on positions held overnight. Such institutional constraints and overnight risk incentivize arbitrageurs who trade on mispricing to reduce their positions before the end of the day. Consistent with this intuition, a mispricing factor earns positive returns throughout the day but performs poorly at the end of the day. This pattern strengthens in the second half of the sample and is shared by several well-known anomalies.
Article
We study how the excess market return depends on the time of the day using E-mini S&P 500 futures that are actively traded for almost 24 hours. Strikingly, four hours around Asian markets’ close and European open account for the entire average market return. This period’s Sharpe ratio is extremely high as overnight volatility is low. Its returns are positive in every year and survive transaction costs. Remarkably, average returns are zero during the remaining 20 hours and almost all sub-intervals. We attribute high returns around European open to the uncertainty resolution as European investors help process information accumulated during Asian trading hours. Consistent with this hypothesis, VIX future returns are positive during the Asian session and highly negative around European open.
Article
Full-text available
Amihud’s stock (il)liquidity measure averages daily ratios of the absolute close-to-close return to dollar volume, including overnight returns. Our modified measure uses open-to-close returns matching return and trading volume measurement windows. It is more strongly correlated with trading-cost measures (by 8%–37%) and better explains cross-sections of returns, doubling estimated liquidity premiums. Using nonsynchronous trading near close, we show overnight returns are primarily information driven: including them in Amihud’s proxy for price impacts of trading magnifies measurement error, understating liquidity premiums. Our modification helps wherever Amihud’s measure is required. Our measures are publicly available for 1964–2019 and can be updated. (JEL G12, G14) Received June 2, 2020; editorial decision September 11, 2020 by Editor Jeffrey Pontiff.
Article
While global stock markets enjoy high returns on days surrounding Federal Open Market Committee (FOMC) meetings, there is no comparable result for other central banks either internationally or, more surprisingly, domestically. Neither announcement surprises nor currency moves drive these findings, which hold even for stocks with a domestic focus. The difference in announcement premia is not explained by economy size, exposure to multinationals, or policy activism. We conclude that the Fed exerts a unique impact on global equities. Consistent with this hypothesis, uncertainty drops across global markets following FOMC announcements but not those of other central banks. Furthermore, the Fed is generally the leader among central banks in setting monetary policy.
Article
Hedging short gamma exposure requires trading in the direction of price movements, thereby creating price momentum. Using intraday returns on over 60 futures on equities, bonds, commodities, and currencies between 1974 and 2020, we find strong market intraday momentum everywhere. The return during the last 30 minutes before the market close is positively predicted by the return during the rest of the day (from previous market close to the last 30 minutes). The predictive power is economically and statistically highly significant, and reverts over the next days. We provide novel evidence that links market intraday momentum to the gamma hedging demand from market participants such as market makers of options and leveraged ETFs.
Article
Market betas have a strong and positive relation with average stock returns on a handful of days every year. Such unique days, defined as leading earnings announcement days (LEADs), are times when an aggregate of influential S&P 500 firms disclose quarterly earnings news early in the earnings season. The positive return-to-beta relation holds for various test portfolios, individual stocks, and Treasuries; and is robust to different data frequencies and testing procedures. On days other than LEADs, the beta-return relation is flat. We conclude that waves of early earnings announcements by large firms clustered on LEADs significantly influence asset pricing.
Article
We provide time-series and cross-sectional evidence on the significance of a risk-return tradeoff in the bond and equity markets. We find a significantly positive intertemporal relation between expected return and risk in the bond market. We also propose novel measures of systematic and idiosyncratic risk for individual corporate bonds and find a significantly positive cross-sectional relation between systematic risk and expected bond returns, whereas there is no significant link between idiosyncratic risk and future bond returns. We provide an explanation for the significance of systematic (idiosyncratic) risk based on different investor preferences and informational frictions in the bond (equity) market.
Article
Mini options are specially catered to retail investors with limited capital for trading options on extremely high-priced securities. The coexistence of both Mini and standard options for the same underlying security provides us a novel setting to investigate whether and how small retail investors use derivatives contracts differently compared to their counterparts. First, we find that the Mini option investors are more subject to constraints of limited attention. Specifically, Mini option investors trade more intensively near market opens, and their trading activities are more heavily influenced by attention-grabbing events and attention-distracting events. Second, we document that Mini option investors’ trading is more likely to be driven by market sentiment than standard option investors. Third, the trading performance of Mini option investors is also worse than that of standard option investors, with less positive intraday returns and more negative overnight returns.
Article
This paper investigates the mean–variance relation during different time periods within trading days. We reveal that there is a positive mean–variance relation when the stock market is closed (i.e., overnight), but the positive relation is distorted when the market is open (i.e., intraday). The evidence offers a new explanation for the weak risk-return tradeoff in stock markets.
Article
As opposed to the “low beta low risk” convention, we show that low beta stocks are illiquid and exposed to high liquidity risk. After adjusting for liquidity risk, low beta stocks no longer outperform high beta stocks. Although investors who “bet against beta” earn a significant beta premium under the Fama–French three- or five-factor models, this strategy fails to generate any significant returns when liquidity risk is accounted for. Our work helps understand the beta premium from a new liquidity-risk perspective, and draws useful implications for both fund and corporate managers. This article is protected by copyright. All rights reserved.
Article
A higher frequency of positive overnight returns followed by negative trading day reversals during a month suggests a more intense daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and arbitrageurs during the day. We show that a more intense daily tug of war predicts higher future returns in the cross section. Additional tests support the conclusion that, in a more intense tug of war, daytime arbitrageurs are more likely to discount the possibility that positive news arrives overnight and thus overcorrect the persistent upward overnight price pressure.
Article
Previous studies of the U.S. market regard short-term reversal as compensation for liquidity provision. However, we find that intraday reversal has no significant dependence on stock liquidity in the Chinese market. Hence, based on a stylized framework, we propose an alternative explanation: irrational uninformed liquidity providers, who underestimate the information component in the equilibrium price due to physiological anchoring, trade against previous price movement, which generates an opposing price pressure. The empirical results confirm this explanation of liquidity oversupply (from irrational uninformed liquidity providers). The negative correlation between previous intraday returns and future returns in the Chinese market is reversed once we extend the holding period. This indicates that reversal is a pricing error due to excessive liquidity provision from uninformed retail traders instead of a price correction from a temporary price concession due to a lack of liquidity.
Article
Investors' behavior and news or events occurring during the market closure affect open price variation. For these reasons, daytime and overnight returns and volatilities move differently. In light of these effects, it is natural to ask whether systematic risk varies between trading and non-trading periods. We answer this question by evaluating the US stocks’ beta from 1992 to 2020. Computing daily, daytime, and overnight betas using a proper market index for each trading period, we show how market risk varies over time and is influenced by market shocks. We observe a high overnight risk concentrated within small and large stocks. We find that daytime systematic risk is generally higher, especially between 2001 and 2019. Furthermore, we show how the outbreak of the Covid-19 pandemic led to an increase in overnight risk implying that US stocks became more sensitive to the market closure.
Article
This study analyzes the impact of US central bank communication on financial markets in emerging economies. We find that informal communication from the Fed positively influences the Korean stock market at a greater magnitude than the US stock market. The results show that the Korean stock market experienced higher excess return when Korea's monetary policy decisions are uncertain, suggesting that central bank communication in central countries could transmit to emerging economics through their monetary policy decisions and uncertainty. In addition, various portfolios and individual equities have a positive market risk-return tradeoff in the presence of Fed communication only.
Article
When the cost of hedging is nil, the conditional capital asset pricing model (CAPM) holds. We empirically test the conditional CAPM by regressing asset returns onto the product of their conditional betas and market returns. Estimated intercepts are not statistically different from zero, implying that the conditional CAPM successfully explains the conditional level of asset returns. Yet, unconditional betas do not explain the cross section of average asset returns; the unconditional CAPM fails. We show why and how the success of the conditional CAPM actually explains the failure of the unconditional CAPM, thereby rationalizing the coexistence of these two intriguing results. This paper was accepted by Gustavo Manso, finance.
Article
We show that a positive risk premium from holding high‐beta stocks (vs. low‐beta stocks) and small‐cap stocks (vs. large‐cap stocks) is reliably earned only after the expected stock‐market volatility breaches a high threshold at about the 80th percentile. When exceeding this threshold at month t − 1 $t-1$, then sizable positive average returns from beta and size exposure are persistently evident over months t + 1 $t+1$ to t + 6 $t+6$; otherwise the premia are near zero. Conversely, we find no comparable threshold behavior for the Fama–French HML, RMW, and CMA factors. Our investigation suggests several economic channels as likely contributors behind these threshold risk‐return findings.
Article
Full-text available
An efficient market (weak form) will contain no significant price pattern, a view supported by numerous empirical studies. Our study, however, reveals a very strong negative autocorrelation between overnight and intraday returns, regardless of our sampling method or the methodology in use. Though this poses potential market mispricing opportunities, we conclude that future studies are needed in order to determine whether anyone other than a market maker can fully exploit these opportunities.
Article
Full-text available
Market efficiency implies that the risk-adjusted returns from holding stocks during regular trading hours should be indistinguishable from the risk-adjusted returns from holding stocks outside those hours. We find evidence to the contrary. We use broad-based index exchange-traded funds for our analysis and the Sharpe ratio to compare returns. The magnitude of this effect is startling. For example, the geometric average close-to-open (CO) risk premium (return minus the risk-free rate) of the QQQQ from 1999-2006 was +23.7 per cent whereas the average open-to-close risk premium was −23.3 per cent with lower volatility for the CO risk premium. This result has broad implications for when investors should buy and sell broadly diversified portfolios.
Article
Many studies report that the size effect in the cross-section of stock returns disappeared after the early 1980s. This paper shows that its disappearance can be attributed to negative shocks to the profitability of small firms and positive shocks to big firms. After adjusting for the price impact of profitability shocks, we find a robust size effect in the cross-section of expected returns after the early 1980s. Our results highlight the importance of in-sample cash-flow shocks in understanding cross-sectional return predictability. Received April 2, 2014; editorial decision August 6, 2018 by Editor Laura Starks.
Article
We link investor heterogeneity to the persistence of the overnight and intraday components of returns. We document strong overnight and intraday firm-level return continuation along with an offsetting cross-period reversal effect, all of which lasts for years. We look for a similar tug of war in the returns of 14 trading strategies, finding in all cases that profits are either earned entirely overnight (for reversal and a variety of momentum strategies) or entirely intraday, typically with profits of opposite signs across these components. We argue that this tug of war should reduce the effectiveness of clienteles pursuing the strategy. Indeed, the smoothed spread between the overnight and intraday return components of a strategy generally forecasts time variation in that strategy's close-to-close performance in a manner consistent with that interpretation. Finally, we link cross-sectional and time-series variation in the decomposition of momentum profits to a specific institutional tug of war.
Article
Using a thirty-year sample of intraday returns on U.S. stocks, I show that asset pricing anomalies accrue over the day in radically different ways. Size and illiquidity premia are realized in the last thirty minutes of trading. Furthermore, the turnover of small stocks relative to that of large stocks spikes around the close. This evidence can be explained by a model in which liquidity deteriorates before the close. Other anomalies, such as profitability and idiosyncratic volatility, accrue gradually throughout the trading day but incur large negative returns overnight. The evidence is consistent with mispricing at the open.
Article
The risk and return trade-off, the cornerstone of modern asset pricing theory, is often of the wrong sign. Our explanation is that high-beta assets are prone to speculative overpricing. When investors disagree about the stock market's prospects, high-beta assets are more sensitive to this aggregate disagreement, experience greater divergence of opinion about their payoffs, and are overpriced due to short-sales constraints. When aggregate disagreement is low, the Security Market Line is upward-sloping due to risk-sharing. When it is high, expected returns can actually decrease with beta. We confirm our theory using a measure of disagreement about stock market earnings.
Article
Weekly and intradaily patterns in common stock prices are examined using transaction data. For large firms, negative Monday close-to-close returns accrue between the Friday close and the Monday open; for smaller firms they accrue primarily during the Monday trading day. For all firms, significant weekday differences in intraday returns accrue during the first 45 minutes after the market opens. On Monday mornings, prices drop, while on the other weekday mornings, they rise. Otherwise the pattern of intraday returns is similar on all weekdays. Most notable is an increase in prices on the last trade of the day.
Article
We use transaction-level data and decompose the US equity premium into day (open to close) and night (close to open) returns. We document the striking result that the US equity premium over the last decade is solely due to overnight returns; the returns during the night are strongly positive, and returns during the day are close to zero and sometimes negative. This day and night effect holds for individual stocks, equity indexes, and futures contracts on equity indexes and is robust across the NYSE and Nasdaq exchanges. Night returns are consistently higher than day returns across days of the week, days of the month, and months of the year. The effect is driven in part by high opening prices which subsequently decline in the first hour of trading.
Article
We decompose the daily stock market returns of 29 countries into daytime trading period and overnight non-trading period returns. We find that the overnight returns are significantly higher than the trading period returns in 23 countries, indicating that the overnight return anomaly exists on a global level. We argue that this phenomenon may be explained by the upward bias of opening prices which is a result of increasing dispersion of opinions among investors over the non-trading period. Consistent with Miller's (1977) optimism theory, we find that the overnight return anomaly is stronger in the markets with short sale constrains.
Article
Since the formal development of the efficient market hypothesis, studies of actual market performance have revealed a number of apparent inconsistencies (anomalies). Herein we report on our discovery of evidence anomaly which relates to the behavior of the overnight and subsequent intraday returns. According to the weak form of the efficient market hypothesis, a time series of returns is supposed to contain no useable degree of auto correlation. Numerous studies have provided strong support for this viewpoint. We may, however, have found evidence which is inconsistent with this hypothesis. The present study grew out of another study which focuses on the behavior of closed end fund returns. In that study we explored the daily return performance of such funds in conjunction with the daily performance of the funds' NAVs. We bifurcated the daily closed end return into an overnight return which reflect that part of the return that takes place between the close and the next day's open and the intraday return which encompasses that part of the return that occurs from the open to the close. The two pieces of the daily return exhibited a very strong negative autocorrelation. Naturally we wanted to explore whether a similar phenomenon was occurring for stocks in general. That is the question that this study seeks to answer. The short answer is yes, we have found the same type of negative auto correlation for stocks in general as we found for the shares of closed end funds. We have found this result for stocks listed on the NYSE, AMEX and NASDAQ. We have found it for both the 2000 to 2005 and 1994 to 1999 periods. When we divide the data into size categories, we find significant relationships for each sub sample. The correlations do, however, tend to be almost monotonically stronger as market capitalization decreases. Not only do we find a powerful negative correlation between the overnight and intraday returns but we also find a relationship between overnight and the prior intraday and the prior overnight returns. The signs of the correlations alternate with adjacent periods having negative correlations and one step back being positively related. We find that the relations hold up as anticipated in a multivariate context. When we add the S&P return to take account of the market return's impact, we find that the regressions' R squares rise but the coefficients on the other dependent variables are largely unaffected. All of our results are highly significant statistically. Most of the R squares are in the low to mid single digits.
Article
The value premium in U.S. stock returns is robust. The positive relation between average return and book-to-market equity is as strong for 1929 to 1963 as for the subsequent period studied in previous papers. A three-factor risk model explains the value premium better than the hypothesis that the book-to-market characteristic is compensated irrespective of risk loadings.
Article
This study provides evidence on joint characteristics of hourly common stock trading volume and returns on the New York Stock Exchange. Average volume traded shows significant differences across trading hours of the day and across days of the week. Average returns differ across hours of the day, and, to some extent, across days of the week. There is a strong contemporaneous relation between trading volume and returns and also a relation between trading volume and returns lagged up to four hours. Furthermore, the trading volume-returns relation is steeper for positive returns than for nonpositive returns.
Article
Testing the two-parameter asset pricing theory is difficult (and currently infeasible). Due to a mathematical equivalence between the individual return/‘beta’ linearity relation and the market portfolio's mean-variance efficiency, any valid test presupposes complete knowledge of the true market portfolio's composition. This implies, inter alia, that every individual asset must be included in a correct test. Errors of inference inducible by incomplete tests are discussed and some ambiguities in published tests are explained.
Article
Many theories in finance imply monotonic patterns in expected returns and other financial variables. The liquidity preference hypothesis predicts higher expected returns for bonds with longer times to maturity; the Capital Asset Pricing Model (CAPM) implies higher expected returns for stocks with higher betas; and standard asset pricing models imply that the pricing kernel is declining in market returns. The full set of implications of monotonicity is generally not exploited in empirical work, however. This paper proposes new and simple ways to test for monotonicity in financial variables and compares the proposed tests with extant alternatives such as t-tests, Bonferroni bounds, and multivariate inequality tests through empirical applications and simulations.
Article
Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion. © 2005 MIT Press
Article
Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the capital asset pricing model, (CAPM), they are called anomalies. The authors find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Their results are consistent with rational intertemporal CAPM or arbitrage pricing theory asset pricing but the authors also consider irrational pricing and data problems as possible explanations. Copyright 1996 by American Finance Association.
Article
Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market "beta", size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in "beta" that is unrelated to size, t he relation between market "beta" and average return is flat, even when "beta" is the only explanatory variable. Copyright 1992 by American Finance Association.
Article
Using transactions data, the behavior of returns and characteristics of trades at the micro level is examined. A minute‐by‐minute market return series is formed and tested for normality and autocorrelation. Evidence of differences in return distributions is found among overnight trades, trades during the first 30 minutes following the market opening, trades at the close, and trades during the remainder of the day. The latter distribution is found to be normal. Unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day. When the beginning‐and end‐of‐the‐day effects are omitted, autocorrelation in the market return series is reduced substantially. A number of patterns in trading are reported.
Betting against beta
  • Frazzini
Intraday patterns in the cross-section of stock returns
  • Heston
Asset pricing: a tale of two days
  • Savor
Risk and return: January vs. the rest of the year
  • Tinic
The illiquidity premium: international evidence
  • Amihud
Paying attention: overnight returns and the hidden cost of buying at the open
  • Berkman
The capital asset pricing model: theory and evidence
  • Fama
Margin constraints and the security market line
  • Jylha
Time series momentum
  • Moskowitz