The Asymmetric Effect of Information Shock on Overnight and Intraday Expected Returns : Evidence from Chinese A-Share Stock Market

We uncover interesting opposite effects of jumps in stock prices on three kind of stock returns: close-to-close expected return, and its two components, namely overnight and intraday return, when heterogeneous investors are confronted with different types of news during trading hours and non-trading hours. In particular, on the one hand, we provide evidence that the long-short strategies based on jump return can generate statistically positive risk-adjusted overnight and close-to-close alphas, while a negative intraday alpha. On the other hand, the Fama-MacBeth regressions demonstrate a positive relation between jump return and the subsequent stock overnight/close-to-close returns, confirming that the positive risk-return tradeoff originates from the overnight period. The positive overnight and close to close premium is pervasive of the least liquid stocks and small firms and particularly micro-caps. Further analysis shows that it is positive jump return rather than negative jump return that mainly contributes to the positive (negative) overnight (intraday) return due to investors’ preference to buying winners in Chinese stock market