Christopher Polk (LSE – London School of Economics; CEPR)

Seminar Canceled

“The Day Destroys the Night, Night Extends the Day: A Clientele Perspective on Equity Premium Variation”

Abstract. We decompose market returns into their overnight and intraday components, which dramatically improves equity premium forecasts. Past smoothed overnight market returns strongly negatively forecast subsequent close-to-close returns (quarterly R² of over 14%), primarily through intraday mean reversion. In contrast, past smoothed intraday market returns strongly positively forecast subsequent overnight returns; this partially-offsetting effect explains PE’s relatively poor forecasting ability (R² only 3%). Our decomposition also resurrects the conditional CAPM: If we allow market betas to vary with past smoothed overnight returns, the unconditional alpha of the four Fama-French non-market factors decreases by 91%. We interpret these return patterns through a clientele perspective. First, individual investor expectations and consumption growth strongly positively forecast overnight market returns; intermediary risk tolerance and household equity share strongly negatively forecast intraday market returns. Second, aggregate discount-rate news associated with revisions in future expected overnight (intraday) returns is positively (negatively) correlated with aggregate cash-flow news. Finally, while the Tech boom and Covid crash/rebound were primarily driven by overnight returns, the Global Financial Crisis was mostly an intraday phenomenon.