Overnight return reversal in the Chinese stock market

ABSTRACT

This article shows that the overnight return reversal is strong at a firm level in the Chinese stock market: the overnight return negatively predicts the first half-hour return of individual stocks. We explain this phenomenon from the perspective of the pre-open auction mechanism. Taking a step further, we find that the Chinese stock market shows a pattern with average negative overnight return and positive first half-hour return. Additionally, the predictability is stronger on negative overnight returns and negative informational shocks compared with positive overnight returns and positive informational shocks. Both phenomena may be led by the combined effects of the pre-open auction mechanism and T + 1 trading rule.

KEYWORDS:

• Overnight return
• predictability
• Chinese stock market
• pre-open auction
• T+1 trading rule

JEL CLASSIFICATION:

• C53
• G11
• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The choice of 3% and￥5 mainly refers to Li, Liu, and Hu (2023) and Liu, Stambaugh, and Yuan (2019), respectively, and combined with the research feature of this article. We also choose other standards (e.g. 2% and 4%, ￥4 and￥6) and get similar results.

² Scenarios of 0 overnight return or first half-hour return are excluded from this table and the sum of all the numbers is less than 1 in consequence.

Additional information

Funding

This work was supported by a National Social Science Key Fund of China [No. 23ZDA041].