Abstract: We decompose the abnormal profits associated with well-known patterns in the cross-section of expected returns into their overnight and intraday components. We show that, on average, all of the abnormal returns on momentum strategies remarkably occur overnight while the abnormal profits on the other trading strategies we consider occur intraday. These patterns are extremely robust across subsamples and indeed are stronger for large-cap and high-price stocks. Furthermore, we find that all of the variables that are anomalous with respect to the Fama-French-Carhart model have risk premiums overnight that partially offset their much larger intraday average returns. Indeed, a closer look reveals that in every case a positive risk premium is earned overnight for the side of the trade that might naturally be deemed as riskier. In fact, we show that an overnight CAPM explains much of the cross- sectional variation in average overnight returns we document. Finally, we argue that investor heterogeneity may explain why momentum profits tend to accrue overnight. We first provide evidence that, relative to individuals, institutions prefer to trade during the day and against the momentum characteristic. We then highlight conditional patterns that reveal a striking tug of war. Either in the time series, when the amount of momentum activity is particularly low, or in the cross-section, when the typical institution holding a stock has a particularly strong need to rebalance, we find that momentum returns are even larger overnight and more strongly reverse during the day. Both cases generate variation in the spread between overnight and intraday returns on the order of 2 percent per month.
Bio: Christopher Polk is Professor of Finance and the Director of the Financial Markets Group Research Centre at the London School of Economics. He completed a Ph.D. in Finance at the University of Chicago and has also taught at Northwestern University’s Kellogg School of Management and Harvard University’s Department of Economics. Professor Polk is currently an Associate Editor of the Journal of Finance and a Research Fellow at the Center for Economic and Policy Research. Professor Polk has published extensively in leading finance and economics journals, including winning paper of the year at the Journal of Financial Economics.
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