Are There Intraday and Overnight Seasonality Effects in China?

Articles From: Quantpedia
Website: Quantpedia


At the moment, there is a lot of attention surrounding overnight anomalies in various types of financial markets. While such effects have been well documented in research, especially in US equities and derivatives, there are other asset classes that are not as well addressed. We previously compiled the most influential studies and built strategy upon them and also examined if similar overnight/intraday phenomenons also exist in the cryptocurrency world.

But let’s now try to explore if there are such opportunities available in foreign equity markets and, if yes, how to utilize them in our trading best. A recent (2022) paper from Jiang, Luo, and Ye contributed appealing evidence in favor of validating these phenomena in the Chinese market. The methodology framework used Fama-French five-factor model using a rolling window of past 12-month daily returns. Data were from China Stock Market Accounting Research (CSMAR) database ranging from 1994 through 2020. Then, academics successfully studied how overnight/intraday beta-return relationships behave.

We highlight the finding that the market MKT factor beta premium is earned exclusively overnight and tend to reverse intraday (and in smaller potency also value HML and profitability RMW), which is the same finding as for the US equities. In contrast, the size SMB factor exhibit significantly opposite pattern: positive intraday premium and negative overnight premium (and the same for investment CMA factor). As one possible explanation, the clientele-based hypothesis, which states that retail investors tend to be the marginal traders at the market open while institutional investors price assets at the market close, is presented.

It is also worth mentioning that these returns are not free of commission costs and fees. Therefore, it would be hard for such a high-turnover strategy to achieve the same results net of costs. But it’s still a very useful finding that can be used as an overlay in combination with other strategies to improve the timing of entering or exiting positions, whether long or short.

Authors: Danling Jiang, Yunfeng Luo, and Zhengke Ye

Title: Factor Beta, Overnight and Intraday Expected Returns in China 


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