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Overnight-Intraday Reversal Everywhere

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “Overnight-Intraday Reversal Everywhere” presents a captivating exploration into a trading strategy that transcends traditional market dynamics. Authored by Robert Kosowski, Chun Liu, Yang Liu, and Tianyu Wang, the study unveils the potential of a strategy that capitalizes on past overnight returns to yield substantial intraday returns across major asset classes.

Ideated as the “overnight-intraday reversal,” this strategy emerges as a potent force, delivering significantly amplified returns compared to the conventional reversal approach. Notably, the paper challenges prevailing explanations, such as investor sentiment and macro-news, by attributing the strategy’s success to a market maker liquidity provision mechanism.

The integration of cross-sectional return dispersion as a predictive factor further enhances the strategy’s efficacy. This introduction sets the stage for an intriguing and unconventional exploration of market dynamics, offering compelling insights into the intricate world of asset trading strategies.

Abstract Of Paper

A strategy that buys securities with low past overnight returns and sells securities with high past overnight returns generates sizeable out-of-sample intraday returns and Sharpe ratios in all major asset classes. This strategy – labeled as overnight-intraday reversal – delivers an average return that is about two to five times larger than those generated by the conventional reversal strategy. Investor sentiment, macro-news announcements, and market uncertainty fail to explain this overnight-intraday reversal return. Our findings are consistent with an asset class-specific market maker liquidity provision mechanism, and we find that cross-sectional return dispersion could well predict the strategy returns.

Original paper – Download PDF

Here you can download the PDF and original paper of Overnight-Intraday Reversal Everywhere.

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Author

Robert Kosowski
Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

Chun Liu
University of Toronto; Tsinghua University – School of Economics and Management

Yang Liu
Hunan University – College of Finance and Statistics

Tianyu Wang
Tsinghua University, School of Economics and Management

Conclusion

The research presented in “Overnight-Intraday Reversal Everywhere” unveils a groundbreaking trading strategy with far-reaching implications for asset classes. The strategy’s exceptional ability to generate considerable intraday returns across diverse markets, notably outperforming conventional approaches, underscores its significance.

Intriguingly, the study’s findings challenge prevailing explanatory factors, such as investor sentiment and macro-news, by attributing success to an asset class-specific market maker liquidity provision mechanism.

Moreover, the incorporation of cross-sectional return dispersion as a predictive element enhances the strategy’s efficacy, further substantiating its robustness.

This conclusion marks a pivotal contribution to the understanding of market dynamics and offers valuable insights for practitioners and scholars seeking to navigate and comprehend the complexities of trading strategies in different asset classes.

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FAQ

What is the main focus of the paper “Overnight-Intraday Reversal Everywhere”?

The main focus of the paper is a trading strategy termed “overnight-intraday reversal.” The strategy involves buying securities with low past overnight returns and selling securities with high past overnight returns. The paper explores the effectiveness of this strategy in generating significant out-of-sample intraday returns across major asset classes, challenging conventional reversal approaches.

How does the “overnight-intraday reversal” strategy perform compared to the conventional reversal strategy?

The “overnight-intraday reversal” strategy outperforms the conventional reversal strategy. The paper reports that this strategy delivers an average return that is about two to five times larger than those generated by the conventional reversal strategy. This highlights the potency and effectiveness of the “overnight-intraday reversal” strategy in producing substantial returns.

What explanations for the success of the “overnight-intraday reversal” strategy does the paper challenge?

The paper challenges prevailing explanations, such as investor sentiment, macro-news announcements, and market uncertainty, for the success of the “overnight-intraday reversal” strategy. Instead, the authors attribute the strategy’s success to an asset class-specific market maker liquidity provision mechanism. This challenges conventional wisdom and provides a unique perspective on the factors driving the efficacy of the strategy.

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