Make Some ‘Noise’ Tonight—Overnight Return as Investor Sentiment Index: Indian Evidence

Abstract

This research, following Aboody et al., 2018, Journal of Financial and Quantitative Analysis, 53(2), 485–505, and using 612,066 firm-day data daily stock returns, examines whether overnight return is a reliable proxy for firm-specific investor sentiment in India. The study also probes into the impact of the COVID-19 crisis on the relevance of overnight returns for Indian stock investors. The time series approach pursued in the study provides evidence of short-term overnight-return persistence, where the impact is more on the firms with complex valuation and arbitrage structures. Moreover, short-term overnight-return persistence is higher during the COVID-19 pandemic period, highlighting its significance as an indicator of firm-specific investor sentiment in the face of market volatility. In contrast to earlier results of transient sentiment-driven mispricing, we demonstrate that overnight returns in India do not reverse over time. We found that even during the height of the epidemic, overnight returns were only partially indicative of firm-specific investor sentiment in emerging markets such as India.