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What Drives Momentum and Reversal? Evidence from Day and Night Signals

Yashar H. Barardehi¹; Vincent Bogousslavsky²; Dmitriy Muravyev³

¹ Virginia Tech · ² Boston College · ³ University of Illinois Urbana-Champaign

Abstract We study how intraday and overnight components of past returns predict future stock returns from 1926 to 2019. Portfolios formed on past intraday returns display momentum without long-term reversal, whereas portfolios formed on past overnight returns display no momentum. We link this asymmetric day-night pattern to the fact that most trading occurs intraday, which has remained stable over time. Evidence from international stock markets, intraday intervals, and analyst expectations suggests that investors underreact to private information revealed through trading. This underreaction mechanism is most consistent with Hong and Stein’s (1999) theory of momentum.

DOI

10.1093/rfs/hhag036

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en

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