Make Money While You Sleep — II

Thanks to Eddy Elfenbein for sending over the data on how the market does over multiple nights when the market is closed.  Unfortunately, the data is skewed because of 9/11, where the market was closed for seven days, and the change from the close to the open was -4.59%.  What should be done with that data point?  When the market closed on Monday 9/10/01, traders expected that the market would reopen as normal on Tuesday, but it didn’t.  The seven day hiatus was not planned, so traders treated it as a one night gap on Monday, but it opened as a seven night gap the next Monday, with negative results.

Now, if you throw out the 9/11 data point, the average price return over a one night gap is 0.005% over the last eight years.  For a multiple night gap, the return is higher — 0.012%.  If you include in 9/11, it is lower — 0.002%.

But what of dividends?  Where do they belong?  They belong to the nighttime returns, because on the morning that a stock goes ex-dividend, on average the price drops at the open to reflect that.  Now, assume a 1.5%/year dividend rate (rounding, the actual is a little higher).  Now the returns for a one night gap are 0.010%, and for a multiple night gap it is 0.024%.  Even counting in 9/11, the result is 0.014%, higher than the single night gap.

One commenter on last night’s post commented that it might not be the risk of holding stock overnight as much as the possibility or occurrence of news flow.  Before the fact, risk and potential news flow are similar concepts.  After all, how does risk shift, but often through news flow changing the opinions that people hold regarding assets?

For a long term investor like me, this all doesn’t matter much.  I’m not going to buy a bunch of futures contracts or ETFs near the close and sell them into the open.  Still, this could be another example of a market anomaly that stems from the perception of a risk which does not occur on average.