Market Return Around the Clock: A Puzzle

We study how the excess market return depends on the time of the day using E-mini S&P 500 futures that are actively traded for almost 24 hours. Strikingly, four hours around European open account for the entire average market return. This period’s returns are consistently positive every year, have an extra-high Sharpe ratio and exceed transaction costs. Average returns are close to zero during the remaining 20 hours. High returns around European open are consistent with European investors processing overnight information and thus resolving uncertainty. Indeed, uncertainty reflected by VIX futures prices increases overnight and plummets around European open. These results shed light on how equity premium is formed at the micro-level.