Separating Overnight Gaps and Intraday Reversals in Equity Factors

Summary

This report summary examines whether separating overnight returns from intraday returns can improve equity reversal factors in China’s A-share market. It links the market’s T+1 trading convention with a possible low-open, rising-intraday pattern that may distort conventional reversal sorts and weaken long portfolios. The proposed approach separates day and night information, constructs an intraday reversal measure focused on the period from 10 a.m. to the close, and combines it with an overnight gap factor.

The summary reports that both large positive and negative overnight gaps are associated with negative next-month alpha, and that the gap signal fades faster than the standard reversal factor. It presents historical performance statistics for the revised and combined factors, including results across several Chinese equity universes. These are backtest claims summarized from the report; the underlying study and detailed methodology are not included here. The authors caution that historical results may not persist if market style or trading structure changes.

Key ideas

• The report argues that overnight and intraday returns can carry distinct information for equity reversal signals.
• It attributes possible distortion in standard reversal sorts to a low-open, rising-intraday pattern under T+1 trading.
• It identifies stronger intraday reversal behavior from 10 a.m. through the close.
• It reports negative next-month alpha after both large overnight gaps up and gaps down.
• The summary describes historical backtests and warns that future market conditions may differ.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.