Overnight Returns, Daytime Reversals, and Future Stock Returns: The Risk of Investing in a Tug of War With Noise Traders

A high frequency of positive overnight returns followed by negative trading day reversals during a month suggests a persistent daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and other investors during the day. We show that a more persistent tug of war predicts higher future returns, both for individual stocks and the overall market. Our results are stronger in situations where it is riskier to trade against noise traders. Additional tests further support the conclusion that investors demand a premium for trading stocks that are more prone to this “noise trader risk.”