The nexus of overnight trend and asset prices in China

Jiaqi Guo; Xing  Han; Kai Li; Youwei Li

doi:10.1016/j.jedc.2024.104997

The nexus of overnight trend and asset prices in China

Jiaqi Guo, Xing Han, Kai Li^*, Youwei Li

^*Corresponding author for this work

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

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Abstract

Leveraging the systematic variations in investor clientele within a day, we validate an adapted version of the Hong and Stein (1999) model that addresses the consequences of slow information diffusion in China. The model predicts that overnight returns, rather than total returns, strongly forecast future returns, as informed overnight clientele underreact to value-relevant signals. Empirically, we establish a consistent overnight trend phenomenon: Firms with a strong overnight trend reliably outperform those with a weak overnight trend in the subsequent month. The phenomenon is more pronounced among stocks with higher levels of information asymmetry, valuation uncertainty, and relative mispricing. Furthermore, the overnight trend predicts positively firm fundamentals in the cross section.

Original language	English
Article number	104997
Pages (from-to)	1-23
Number of pages	23
Journal	Journal of Economic Dynamics and Control
Volume	170
DOIs	https://doi.org/10.1016/j.jedc.2024.104997
Publication status	Published - Jan 2025

Bibliographical note

© 2024 The Author(s). Published by Elsevier B.V. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

Keywords

Overnight trend
Investor clientele
Momentum
Slow diffusion of information: Asset prices

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10.1016/j.jedc.2024.104997Licence: CC BY

Publisher version (open access)Final published version, 1.04 MBLicence: CC BY

Cite this

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title = "The nexus of overnight trend and asset prices in China",

abstract = "Leveraging the systematic variations in investor clientele within a day, we validate an adapted version of the Hong and Stein (1999) model that addresses the consequences of slow information diffusion in China. The model predicts that overnight returns, rather than total returns, strongly forecast future returns, as informed overnight clientele underreact to value-relevant signals. Empirically, we establish a consistent overnight trend phenomenon: Firms with a strong overnight trend reliably outperform those with a weak overnight trend in the subsequent month. The phenomenon is more pronounced among stocks with higher levels of information asymmetry, valuation uncertainty, and relative mispricing. Furthermore, the overnight trend predicts positively firm fundamentals in the cross section.",

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AU - Guo, Jiaqi

AU - Han, Xing

AU - Li, Kai

AU - Li, Youwei

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N2 - Leveraging the systematic variations in investor clientele within a day, we validate an adapted version of the Hong and Stein (1999) model that addresses the consequences of slow information diffusion in China. The model predicts that overnight returns, rather than total returns, strongly forecast future returns, as informed overnight clientele underreact to value-relevant signals. Empirically, we establish a consistent overnight trend phenomenon: Firms with a strong overnight trend reliably outperform those with a weak overnight trend in the subsequent month. The phenomenon is more pronounced among stocks with higher levels of information asymmetry, valuation uncertainty, and relative mispricing. Furthermore, the overnight trend predicts positively firm fundamentals in the cross section.

AB - Leveraging the systematic variations in investor clientele within a day, we validate an adapted version of the Hong and Stein (1999) model that addresses the consequences of slow information diffusion in China. The model predicts that overnight returns, rather than total returns, strongly forecast future returns, as informed overnight clientele underreact to value-relevant signals. Empirically, we establish a consistent overnight trend phenomenon: Firms with a strong overnight trend reliably outperform those with a weak overnight trend in the subsequent month. The phenomenon is more pronounced among stocks with higher levels of information asymmetry, valuation uncertainty, and relative mispricing. Furthermore, the overnight trend predicts positively firm fundamentals in the cross section.

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KW - Momentum

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The nexus of overnight trend and asset prices in China

Abstract

Bibliographical note

Keywords

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