Do stock returns during extended market hours (4:00PM-8:00PM and 4:00AM-9:30AM) reliably predict subsequent returns during normal market hours? In their July 2016 paper entitled “Are Extended Hours Prices Predictive of Subsequent Stock Returns?”, Shai Levi, Joshua Livnat, Li Zhang and Xiao-Jun Zhang investigate whether extended hours stock returns predict returns the next day and over subsequent longer drift intervals. They focus on stocks with extended hours news (earnings releases, analyst rating changes or SEC form filings). They hypothesize that relatively informed institutional investors dominate extended hours trading and that their trading immediately on news reflects information rather than a need for liquidity. Using normal and extended hours stock returns and volumes for sessions around relevant news releases and for firms without news releases from News Quantified during 2006 through 2014, returns over subsequent drift intervals and earnings surprise data, they find that:
- Regarding news timing:
- For quarterly earnings announcements, 96% occur during extended hours, about half in the morning and half in the evening.
- For analyst rating changes, 81% occur before, 14% during and 5% after normal hours. About 52% are downgrades and 48% upgrades.
- For SEC filings, 27% occur before, 25% during and 48% after normal hours.
- For stocks with no news, extended hours return relates weakly and negatively to next normal hours return (suggesting extended hours liquidity trading).
- For stocks with news, extended hours return relates positively and significantly to next normal hours return. Specifically for earnings announcements, extended hours return is a better predictor of next normal hours return than level of earnings surprise.
- Regarding subsequent drift return (normalized by subtracting value-weighted average return of stocks with similar size, book to market ratio and return momentum):
- Both level of earnings surprise and extended hours return relate positively and significantly to the drift return from two days after current quarterly earnings announcement to or through the next earnings announcement, with the extended hours return incrementally informative to earnings surprise.
- For pre-market analyst rating changes, pre-market return is a better predictor than normal hours return of drift return over the next quarter.
- For SEC filings, especially 8-Ks filed during extended hours, extended hours return is a reliable indicator of subsequent drift return.
In summary, evidence indicates that pre-market and after-market trading of stocks with news is informed. Returns during these intervals are generally predictive of next-day and subsequent drift returns.
Cautions regarding findings include:
- The study does not address feasibility/effectiveness of any trading strategies designed to exploit findings.
- The sample period is not long in terms of variety of market conditions. The study does not investigate whether the very unusual market conditions of 2008-2009 drive findings.
