When it comes to investing and strategy in finance, timing is everything. What if investors could make gains while sleeping? What if, instead of counting sheep, investors were counting profits?
The latest research from the Broad College reveals a phenomenon where this can happen. When it comes to U.S. equity market returns, the best time for profit is between 11:30 p.m. and 3:30 a.m., when investors are typically fast asleep.
Dmitriy Muravyev, associate professor of finance
“Prior academic studies show that stock returns are positive at night and close to zero during a day,” Dmitriy Muravyev, associate professor of finance, said. “These studies only observe prices at today’s close and tomorrow’s open (but not in between) and thus lack data to properly study overnight returns.
“We realize that investors actively trade equity index futures almost 24 hours a day, and thus we can identify when exactly the stock market increases during the night.”
Muravyev’s research is captured in a paper titled “Market Return Around the Clock: A Puzzle,” which was recently accepted for publication in the Journal of Financial Quantitative Analysis. Muravyev coauthored the paper with Oleg Bondarenko, professor of finance at the University of Illinois Chicago.
To study market returns around the clock, the researchers examined trade data spanning 2006–2018. Specifically, they looked at prices of E-mini S&P 500 futures, which are traded electronically nearly 24 hours a day.
Their findings reveal that 100% of the average market return is concentrated in this four-hour late-night time slot, with returns occurring in every year examined.
So, why would this time be the most profitable? It happens to correlate with the European market opening.
As explained in the paper, a trading day can be informally split into three regimes — Asia, Europe and the United States — which differ in investor composition, news geography and trading activity. The start of the profitable window, 11:30 p.m., corresponds to 4:30 a.m. German time, when the first European investors wake up and check the market. The positive return trend accelerates around 1:30 a.m., or 7:30 a.m. in Europe, when many investors arrive at the office before the market opens at 8:00 a.m.
As one market opens, another closes. The Asian market — a powerhouse that impacts the S&P 500 — closes during this same four-hour window. Muravyev and Bondarenko relied on daylight saving time to show which area drives this profit puzzle.
“China closes at 2:00 a.m., exactly when Frankfurt and London open, and Hong Kong closes at 3:00 a.m.,” they explain in the paper. “Daylight saving time helps us separate the effects of Asian close and European open because Asia does not observe DST.”
When the clocks are adjusted each spring and fall in Europe and the United States, the market returns remain constant with European open but shift for Asia.
To confirm that European investors indeed drive up positive returns during this four-hour window, the authors also examined unique European holidays. They found that for these specific holidays, where European investors are away from the market, returns are close to zero between 11:30 p.m. and 3:30 a.m.
As the researchers pointed out, although European investors are often overlooked, this finding illustrates their critical role in resolving market uncertainty — which brings about higher returns.
“During the day, it is natural to assume that U.S. investors are central to pricing U.S. stocks that constitute the S&P 500 index,” Muravyev said. “But we show that stock returns are positive on average only during the four-hour window at night when U.S. investors are absent from the market. When U.S. investors are absent, European investors naturally play a leading role.”
When European investors rise and shine, they process information about the market by looking at trading patterns in related securities, social media sentiment and broadcast news. E-mini investors then “vote” on how the arriving information should affect the S&P 500. As they vote, the information uncertainty is being resolved and stock prices increase.
For people looking to make the most of this finding, there’s no need to lose any shut-eye.
“Anyone from large institutional investors to retail investors can benefit from our results,” Muravyev said. “A simple strategy would be to buy E-mini S&P 500 futures around 11:30 p.m. and sell them around 3:30 a.m. if the stock market dropped a lot during the prior U.S. trading day. Most brokers let you submit time-specific orders in advance, so you do not have to wake up in the middle of the night.”
Muravyev cautioned that his research should not be considered investment advice because as markets become more efficient, today’s strategy may not always perform well tomorrow.
“This return pattern may change as investors learn about it, especially if it constitutes a market inefficiency,” he said. “On the other hand, S&P 500 is so massively large that many investors have to change their behavior before it affects the index.”
Looking ahead, Muravyev says more research is needed to understand the bigger puzzle at play: why average stock market returns are zero most of the time, outside this four-hour window.
