A new University of Utah study offers some surprising advice to crack-of-dawn stock traders: Try sleeping in instead.

Mike Cooper, a professor at the university’s David Eccles School of Business, says his examination of stock market returns from 1993 to 2006 yielded the finding that nighttime returns from those years were higher those made during the day. Perhaps even more striking is the fact that gains in the S&P 500 over that period were solely due to overnight returns 

“All the price discovery, the positive returns, came from after the market closed to when the market opened,” he says.

“Return Differences between Trading and Non-trading Hours: Like Night and Day” was co-authored by Cooper, Michael Cliff of Virginia Tech’s Pamplin College of Business and Huseyin Gulen of Purdue University’s Krannert Graduate School of Management. The research paper’s data demonstrates a broad trend that Cooper says contradicts the conventional thinking on the subject.

“We were very surprised,” he says. “The standard academic literature would suggest that information and risk should be incorporated during the day, but we’re finding the exact opposite there.”

The day/night effect occurred not just in individual stocks, Cooper says; equity indexes and futures contracts on equity indexes at both the NYSE and Nasdaq exchanges were also affected.

Over the duration of the study, average night returns ranged from 2.82 basis points to 4.76 basis points, while day returns ranged from negative 2.85 basis points to 0.22 basis points. The difference in returns between night and day ranged from 2.61 basis points to 7.61 basis points.

Breaking the data down to individual days of the week, the stocks in the S&P 500 index had positive nighttime returns all five weekdays. In contrast, there were negative daytime returns three out of five days, and returns of nearly zero the other two days.

There are several plausible explanations for the trend, Cooper says, among them firms’ recent habit of reporting quarterly earnings after markets close for the day. But he also points to the rise of hedge funds.

“Some of the very high-frequency hedge funds have a desire, at the end of the day, to get rid of their exposure to market risk, to be beta neutral,” he says. “I think some of this could be driven by the trading of high-frequency hedge funds.”

Because much of the loss in daytime returns comes early in the day -- “in the first hour of so, there’s a very reliable dip down,” Cooper says -- he believes his research could be of use to investment banks that use algorithms to time their trading over the course of the day.

The study also sends a clear message to individuals deciding when to invest their money.

“The importance of this paper for the casual investor might be the idea that if you’re going to trade into some new stock, there’s nothing wrong with waiting until later in the day. It’s probably not good to trade at the open,” Cooper says.

About the authors

Michael Cooper is a professor in the department of finance in the University of Utah’s David Eccles School of Business. He earned his Ph.D. in 1996 from the University of North Carolina at Chapel Hill. His research focuses on investments, with an emphasis on equity returns predictability, related data-snooping issues and the behavior of mutual fund investors, and has appeared in academic journals including the Journal of Business, the Journal of Corporate Finance, the Journal of Finance and The Review of Financial Studies. His work has also been covered in the popular press, with articles in the Wall Street Journal, the New York Times, the Washington Post, USA Today and the Financial Times.

Michael Cliff is an assistant professor of finance at Virginia Tech’s Pamplin College of Business. He received his Ph.D. from the University of North Carolina at Chapel Hill in 2000 and his bachelor’s in finance from Virginia Tech in 1993. He has also taught at Purdue University and the University of North Carolina. His research focuses on investments, banking and financial markets, with an emphasis on valuation, public utility rate issues and regulatory finance.

Huseyin Gulen is an associate professor of finance at Purdue University’s Krannert Graduate School of Management. He earned his Ph.D. in 2001 from Purdue and his bachelor’s in electrical and electronics engineering from Middle East Technical University in Turkey in 1992. His current research focuses on CEO pay and its relation to future performance, asset growth and time series predictability and flowback in foreign acquisition of U.S. firms.

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