Investor Overreaction, Overnight Price Jumps and Return Predictability in US Stock Markets

Abstract

Using a very large data set with more than 9,700 stocks listed on NYSE, AMEX and NASDAQ, we analyze overnight price jumps and report short-term investor overreaction to information shocks and document return predictability up to 5 days. The price dynamics imply that overreaction and return reversal after overnight jumps are short-term market phenomena. We also report that overnight, intraday and daily jump incidences are negatively correlated with prevailing conditional market volatility for almost each partition of a day cycle. In a similar fashion, worsening market-wide liquidity conditions are associated with more intraday and daily negative jumps. Our study stands at the intersection of overreaction, jump and return predictability literatures by paying special attention to investor behaviors around price discontinuities and testing the return predictability of post-shock cumulative returns. JEL classification: G10; G11; G12; G14; G40 Keywords: Price Jumps; Overreaction; Return Predictability