Archive / Equities & volatility / E876
Stocks that gap at the open do not reverse during the day
Shorting stock perpetuals with the biggest overnight gains and buying the biggest losers from the open to the close lost 15.2 bp per day on a broad panel, against a required gain of 30 bp.
A common belief says retail investors pile into attention-grabbing stocks at the opening auction, lifting the open, and that the move fades during the day. We ranked US single-stock perpetuals by their overnight return each weekday, bought the bottom third and shorted the top third from 09:40 to 15:55 New York time. On the broad panel the spread lost 15.2 bp per day over 81 validation days (t = -0.71), and on a 9-name subset it lost 14.3 bp (t = -1.18). The 22 bp round-trip cost was never covered, the sign points the wrong way, and the daily noise was too large to see a 30 bp effect.
Stocks that jump overnight are pushed up at the open by retail buying, and give the move back by the close.
Why people believe it
People argue that retail investors place market orders at the open for stocks that made the news, so the opening price overshoots and the day then erodes it. The mechanism is taken from an academic study of attention-driven overnight buying (2012); this test applies it to a short sample of stock perpetuals rather than to the stocks themselves.
Why it would persist The argument, as stated before testing
People argue that the move is too small and too short-lived to arbitrage: it has to be traded every day, in many names, at a cost close to the size of the effect.
Each US trading day we measured every stock perpetual's return from the previous 16:00 New York close to 09:35 the next morning, using the venue's index price, which tracks the cash market while it is open. Names were ranked by that overnight move relative to the daily average. We bought the bottom third and shorted the top third at 09:40 and closed both at 15:55, charging 22 bp for the round trip. The rule and its pass and kill lines were recorded with the test, before its first run, and the second half of the sample was held out to decide.
Broad-panel validation gross spread at least 30 bp with t at least 2.5 (days as units), and the 9-name validation net 95% interval above 0.
Broad-panel validation gross spread at or below 0, or 9-name validation gross below 22 bp.
4 legs at 5 bp plus 0.5 bp each, 22 bp per round trip, subtracted from the daily spread. Funding is not modelled.
None. No earnings filter was applied, so nights with earnings announcements enter in both directions.
The rule failed both pre-set tests: the broad-panel validation spread was below zero (-15.2 bp gross) and the 9-name validation gross (-14.3 bp) was below the 22 bp cost.
- Broad panel, validation (81 days, median 99 names): gross spread -15.2 bp per day (t = -0.71), which is -37.2 bp net of the 22 bp cost. Net median -37.7 bp, worst day -413 bp net (-391 bp gross). The net interval from resampling days is -77.9 to +5.7 bp.
- 9-name subset, validation (81 days): gross -14.3 bp per day (t = -1.18), -36.3 bp net, interval -60.1 to -12.5 bp net. Only 42% of days had a positive gross spread.
- Selection period: broad panel -40.3 bp gross over 28 days (t = -1.17), subset -3.0 bp over 57 days (t = -0.24). All four gross figures have the same sign, and none is distinguishable from zero.
- A negative spread (-15.2 bp broad panel, -14.3 bp subset) means the names with the largest overnight gains kept rising on average, which is continuation, not reversal. At t-statistics of -0.71 and -1.18 that reading is not established.
- Realised daily noise was about three times the pre-registered assumption (broad panel 192 bp against 60 bp), so the broad-panel validation interval (-55.9 to +27.7 bp) could not rule out an effect below about 28 bp.
The spread is negative in every cell
Mean daily gross long-short spread (long the most negative overnight movers, short the most positive) with a 95% interval from resampling days. All four intervals include zero and sit far below the +30 bp pass line and the 22 bp cost.
Chart data (bp)
| Mean | 95% low | 95% high | |
|---|---|---|---|
| Broad panel, validation (81 days) | -15.2 | -55.9 | 27.7 |
| Broad panel, selection (28 days) | -40.3 | -104.8 | 27.8 |
| 9-name subset, validation (81 days) | -14.3 | -38.1 | 9.5 |
| 9-name subset, selection (57 days) | -3 | -28.3 | 21.3 |
Cost makes every cell worse
GrossNet of 22 bp
Mean daily spread before and after the 22 bp round-trip cost. Gross is already negative, so the cost only deepens the loss.
Chart data (bp)
| Gross | Net of 22 bp | |
|---|---|---|
| Broad panel, validation | -15.2 | -37.2 |
| Broad panel, selection | -40.3 | -62.3 |
| 9-name subset, validation | -14.3 | -36.3 |
| 9-name subset, selection | -3 | -25 |
Daily noise swamps any effect
Broad panel9-name subset
Number of validation days by gross daily spread in bp. The broad panel is much wider than the subset, with a standard deviation of 192 bp against 109 bp, and both are centred slightly below zero.
Chart data (days)
| Bin | Broad panel (count) | 9-name subset (count) |
|---|---|---|
| < -300 | 4 | 2 |
| -300..-200 | 7 | 1 |
| -200..-100 | 15 | 10 |
| -100..-50 | 8 | 18 |
| -50..0 | 12 | 16 |
| 0..50 | 14 | 14 |
| 50..100 | 4 | 10 |
| 100..200 | 7 | 8 |
| 200..300 | 5 | 1 |
| > 300 | 5 | 1 |
Why it failed Interpretation · not established
No overnight-to-intraday reversal shows up. The point estimates lean towards continuation, but with t-statistics of -0.71 and -1.18 that is noise. One reading is that the opening prices of liquid US stocks are already efficient and carry no retail overshoot to give back; another is that overnight moves in this sample reflect news that is still being digested during the day. Neither is tested here. A further limit is that no earnings filter was used, so earnings nights, which inflate overnight moves in both directions, are mixed in.
Lesson
A cross-sectional spread built on a daily ranking of about a hundred names still has a very wide daily distribution: here 192 bp, three times what was assumed. Before reading a short sample as "no effect", the realised noise has to be checked against the effect size that the pass line requires; with this much noise, 81 days could not rule out an effect below about 28 bp (broad panel).
Scope of this result
Covers US single-stock perpetuals on one large crypto perpetual venue, ranked by index-based overnight return, entered at 09:40 and exited at 15:55 New York time on weekdays, April to October 2026 (broad panel from May), at a 22 bp round-trip cost. The sample is under seven months long. It does not cover earnings-filtered nights, the cash stocks themselves or any other horizon.
A rejected experiment applies to the tested conditions and does not prove an idea can never work. bp = basis point, 0.01%.
1. Test design
Pre-registeredDataUniverseSignalExecutionCostsControlsSample splitPass criterionKill criterionPower2. Result
ObservationsInstrumentsNet mean95% intervalMedianWorstFinding 1Finding 2Finding 3Finding 4Finding 53. Interpretation
Why it failedLessonScope4. Reproducibility
StepsGrade