The Disappearing Overnight Drift

Federal Reserve Bank

Nina Boyarchenko

Article

6 Pages

The authors revisit the “overnight drift” anomaly in U.S. equity futures and find that a once-profitable trading window around the European market open has effectively disappeared. Rather than market efficiency alone, they argue the change stems from smaller end-of-day order imbalances that have reduced the inventory risk faced by liquidity providers.

Key Takeaways

Anomaly Disappeared: The 2:00–3:00 a.m. ET window once generated roughly 3.7% annualized returns but has averaged near zero since 2021.
Order Imbalances Shrank: End-of-day order imbalance dispersion fell from 6.5% to 2.9%, a decline of more than 50%, largely explaining the vanished overnight premium.
Other Factors Stable: The average VIX declined only from 20.4 to 19.4, while overnight trading volume edged up just from 15% to 16%, suggesting neither volatility nor liquidity drove the change.
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