Weekly Seasonality in Overnight Effects of the Stock Market

Abstract

This paper provides a comprehensive study of the weekly seasonality of the overnight effect in US large-cap stocks and index exchange-traded funds (ETFs). We identify a distinct pattern: a statistically significant positive Monday-to-Tuesday and negative Friday-to-next-Monday overnight (close to next open) return in large-cap US equities and index ETFs. We find overnight effect exhibits statistically significant patterns depending on the day of the week. This paper focuses on the weekly seasonality of this effect, exploring how the overnight return patterns vary across the weekdays. A short-term trading model is built to buy these stocks and ETFs before the market close and sell at the opening of the next trading day, and skips Wednesday and/or Friday. This model outperforms the market in both bull and bear conditions with higher Sharpe ratio.