The effects of overnight events on daytime trading sessions

ABSTRACT

This study investigates the association between overnight and daytime-trading session returns in U.S. equity markets over the last 14 years and interprets it using the overreaction hypothesis. To identify the effects of overnight overreactions on daytime trading sessions, we control for daily investor sentiment, firms' fundamental variables, and risk factors. Our results suggest that investors tend to overreact overnight and react more dispassionately during daytime trading sessions. Investors' reactions differ across sectors, and the degree of overreaction is greater in cyclical industries than in defensive industries. Additionally, we analyze the impacts of overnight reactions on daytime trading sessions focusing on recession periods. The impacts differ by subperiods and are pronounced during the Global Financial Crisis and the onset of the COVID-19 pandemic. Investors' reactions to overnight news events also respond differently to demand and supply shock-induced recessions.