The night effect has the potential to provide investors strong returns with lower risk.
Night has delivered much of U.S. large cap equities’ return with much lower volatility over the past 20 years. While the night session does not always outperform the day session, the night effect has been shown to be persistent across multiple time periods and markets.
According to Boyarchenko, Larsen, Whelan (2002), “U.S. equity returns are large and positive during the opening hours of European markets. These returns are pervasive, economically large, and highly statistically significant.”
The large positive drift in returns is consistent with standard theories of demand for immediacy and the associated liquidity provision by risk-averse market makers. According to Boyarchenko, Larsen, and Whelan, overnight returns have a strong relationship with U.S. end-of-day order imbalances, and that the relationship is asymmetric: while large negative order imbalances at the end of the U.S. trading day are followed by large return reversals overnight, the response to large positive end-of-day order imbalances is muted.
The asymmetry in return reversals following negative and positive order imbalance days is what generates the unconditionally positive returns around European opening times, according to Boyarchenko, Larsen, and Whelan.
Investors can efficiently capture the night effect with the (NSPY ), the (NIWM ), and the (NSPL ).
NSPY offers exposure to the night performance of 500 large-cap U.S. companies, while the NIWM provides exposure to the night performance of 2000 small-cap U.S. companies.
NSPL offers exposure to both night and day sessions, tilting torward the night. The fund provides investment results, before fees and expenses, that correspond to 100% of the performance of a portfolio of 500 large-cap U.S. companies during the day and 150% of the portfolio performance at night.
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