Why Do the Synthetic Stocks Have Higher Overnight Returns than the Underlying Stocks in Chinese Markets?

This paper constructs the synthetic stocks with put-call parity and compares the overnight and intraday returns of the synthetic and actual stocks in Chinese markets. The synthetic stocks have higher (lower) overnight (intraday) returns than the underlying stocks. We relate the findings to the “T+1” trading rule in Chinese stock market. We show that the return differences between the synthetic and actual stocks are positive at the market open and decrease to near zero at the market close. This paper suggests that the overnight return discounts of stocks are determined by the potential intraday trading profits without “T+1” restrictions