Does overnight return predict the first half-hour return for U.S. market indices?

Abstract

This study investigates intraday time series reversal in U.S. market indices. We find that the high overnight return negatively predicts the first half-hour return for U.S. market indices. This pattern has not been observed in the time series reversal literature, which focuses on returns over past several years. Our findings also differ from those of studies on intraday time series momentum studies, which report that the first half-hour return predicts the last half-hour return. Furthermore, we find that our intraday reversal strengthens during periods of high volatility, including the global financial crisis and the early phase of the COVID-19 pandemic. In contrast, it weakened after the 2010s and during the later phase of the pandemic. These findings suggest that intraday reversal is associated with the presence of opposing investor clienteles—overnight buying by retail investors and daytime selling by arbitrageurs. Moreover, we do not observe intraday reversal for other ETFs that track international market indices. Finally, we propose investment strategies based on intraday reversal and present that they are profitable for U.S. market indices but not for international market indices.