Between Night And Day – The Night Effect On Markets

Julius Buchanan, Managing Editor, Wealth Solutions Report

ETF Veteran Explains How Shares Perform Differently Outside Trading Hours, The Pros And Cons Of Using The Night Effect To Invest, And Which Client Needs It May Address   

Science and culture attest to the manifold differences between night and day so often that we have coined the phrase “night and day” to indicate opposites. From ancient religious texts to popular music, from biology to psychology, we live by and even sing about the differences between night and day.

It should come as no surprise that finance researchers have also found statistically significant differences between night and day, or market hours versus non-market hours, for some financial markets. 

Night and day

Bruce Lavine, CEO of recently launched ETF provider NightShares, has conducted extensive research into the differences in market movement and volatility between market-hours trading and trading when markets are closed. With decades of C-suite and executive experience in wealth management and ETFs, including almost 16 years with WisdomTree Investments and seven years at iShares, Lavine is responsible for launching various ETFs.

Bruce Lavine, CEO, NightShares

We caught up with him to learn more about the night effect in markets, its pros and cons and how advisors might leverage it for clients.

WSR: How does the night effect work? Where are its effects visible?

Lavine: The “night effect” refers to an academically well-documented historical tendency for overnight markets (after close and before opening) to outperform daytime markets (between open and close) on a risk-adjusted basis. Simply buying at the close and selling the next morning at the open captures much of the return in markets with substantially less volatility.  

Our research found that approximately 75% of the return of the S&P 500 and over 100% of the return of the Russell 2000 came in the overnight session over the last 20 years. In both cases, the volatility of owning during the night only was about 55-60% of owning during the full 24-hour period.  

The reasons for the night effect include certain information flows that occur when the market is closed (e.g., M&A and earnings), an investor behavior component, structural risk aversion to overnight positions among institutional investors and investors seeking to avoid interest, capital charges and reporting requirements on positions by exiting them at the end of the day.

WSR: How does the night effect relate to risk?

Lavine: The night session is substantially less volatile than the daytime. Whereas markets react to macro news both overnight and during the day, the day sessions appear to have a much greater investor behavior component fueled by many more participants, day traders (who are often emotional) and more volatile algorithmic trading. 

The day session has more extreme return events in both directions than the night session, often reaching 1% or even 2%. To use a baseball analogy, the night session gets a lot of singles and walks while the day session hits some home runs but also strikes out a fair amount.

WSR: What are the pros and cons of investments that leverage the night effect?

Advancing one base at a time

Lavine: The reason to invest in the night effect is that it has historically superior risk-adjusted returns to owning for the full 24-hour period. In investing, the goal is to maximize your return per unit risk (i.e., the Sharpe ratio) and that is what the night effect does. At the portfolio level, you can think of the night effect as a factor or a risk premia that can both diversify and put an investor on a more efficient frontier. 

Importantly, the night effect works over time but not all the time. As with other factors, there are times of outperformance and underperformance. A strategy of only owning during the night can also deviate substantially from a strategy that holds over 24 hours. 

WSR: For which clients should an advisor consider some portfolio allocation to investments that leverage the night effect?

Lavine: The night effect has relevance for a wide swath of investors. There are two ways to think about leveraging the night effect. First, an advisor can tilt portfolios that typically have equal day and night exposure to ones that asymmetrically lean into the night session. In this case, an investor can replace a portion of their traditional buy-and-hold large and small cap exposures with a night-focused approach. 

Second, the investor can place night effect investments into a sleeve of alternative exposures that add diversification and reduce correlation with the core of the portfolio.

Julius Buchanan, Managing Editor at Wealth Solutions Report, can be reached at

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