Market Return Around the Clock

Performance

• Key Result: The entire average market return is concentrated in the four-hour window around the European market open (11:30 PM – 3:30 AM ET).
• Annualized Return: 7.6% during this window, while returns are nearly zero for the remaining 20 hours.
• Sharpe Ratio: 1.67 for this period, significantly higher than the full-day market Sharpe.

Key Idea

Stock market returns are not evenly distributed throughout the trading day. Instead, the majority of excess returns are generated during a specific four-hour window before European markets open. This return pattern is consistent across years, months, and weekdays.

Economic Rationale

• Uncertainty Resolution Hypothesis:
  • Overnight, uncertainty accumulates as fewer investors are active.
  • When European investors enter the market, they incorporate overnight information, resolving uncertainty.
  • This causes price increases, explaining why returns cluster during this period.
• Supporting Evidence:
  • VIX futures rise during the Asian session (reflecting increasing uncertainty).
  • VIX futures drop sharply during the EU-open period, indicating uncertainty resolution.

Practical Applications

• Trading Strategy:
  • Buy S&P 500 E-mini futures before 11:30 PM ET and close the position at 3:30 AM ET.
  • The strategy is profitable even after transaction costs and has a Sharpe ratio higher than the buy-and-hold alternative.
• Market Timing for Institutions:
  • Large institutional trades should be timed before EU-open to capture this return anomaly.

How to Do It

Data

• E-mini S&P 500 futures (ES)
• VIX futures
• Sample period: January 2004 – July 2018
• Intraday minute-by-minute price data from CME

Model/Methodology

• Identify high-return windows:
  • Compute annualized returns by minute over 24-hour trading sessions.
  • Compare cumulative returns for different time windows.
• Measure uncertainty resolution:
  • Track overnight VIX movements and correlation with EU-open returns.
• Test robustness:
  • Adjust for microstructure biases (bid-ask bounce, market impact).
  • Control for external shocks (FOMC days, macroeconomic news).

Strategy Execution

1. Enter Long Position: Buy S&P 500 E-mini futures at 11:30 PM ET.
2. Exit Position: Close at 3:30 AM ET before London open.
3. Risk Management:
   • Avoid trading on European holidays (returns are lower).
   • Use conditional trading based on overnight volatility and VIX movements to improve Sharpe ratio.
4. Capacity Estimate:
   • The strategy can scale up to $9 billion in exposure, generating $50 million in annualized after-cost profits.

Key Figure

Figure 1 shows cumulative market return across 24 hours.

• Returns remain flat throughout most of the day except for the EU-open period.
• No other trading window exhibits statistically significant positive returns.

Paper Details

• Authors: Oleg Bondarenko & Dmitriy Muravyev
• Publication: SSRN Electronic Journal, 2020
• Link: SSRN Abstract