Why do stock prices move more while the market is open?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
gordoni2
Posts: 194
Joined: Wed Aug 15, 2007 12:20 am
Contact:

Why do stock prices move more while the market is open?

Post by gordoni2 » Sat May 06, 2017 1:38 am

I took daily data for the S&P 500 index from Yahoo Finance and separated out the opening price to closing price return, and the previous day's closing price to current day's opening price return:



Image



The market seems to both trend more, and be more volatile, when the market is open than when the market is closed. Can anyone explain why? If the market represents the value of economic assets I would have expected their value to be increasing even while the market is closed. Also a lot of news gets released when the market is closed, so I would have expected the market to be more volatile when it is closed.



Repeating the exercise with an individual stock, Microsoft, from 1987 through 2016 gives broadly similar results.

Call_Me_Op
Posts: 6705
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Why do stock prices move more while the market is open?

Post by Call_Me_Op » Sat May 06, 2017 6:19 am

The value of assets does not go up (or down) on their own. The prices are set by people who trade the assets.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

AlohaJoe
Posts: 2828
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Why do stock prices move more while the market is open?

Post by AlohaJoe » Sat May 06, 2017 8:33 am

Sure, but after hours trading has been available for a long time now. (Decades?)

Naively, I'd think that even with lower volumes they'd still be higher volumes than the daily volumes of 20 years ago.

And things do shift after hours...the election was a recent example where futures traded overnight.

So I'm a little surprised at how little action there is in Gordon's question.

User avatar
jhfenton
Posts: 2629
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Why do stock prices move more while the market is open?

Post by jhfenton » Sat May 06, 2017 10:32 am

AlohaJoe wrote:So I'm a little surprised at how little action there is in Gordon's question.
+1

If the data is accurate, I'm shocked at how little net change in price there is overnight. Earnings are reported before the market opens or after it closes. Overseas economic news and market events come out while the U.S. market is closed. I know there is anchoring each morning on the previous day's close, but I would still have expected a good chunk of the overall change in price each day to occur between the close and open.

And it seems to me the phenomenon would be exploitable, if true, and should, therefore, cease to be true in short order.

grok87
Posts: 7651
Joined: Tue Feb 27, 2007 9:00 pm

Re: Why do stock prices move more while the market is open?

Post by grok87 » Sat May 06, 2017 10:38 am

this reminds me of Shiller's landmark 1980 paper
http://www.nber.org/papers/w0456
"DO stock prices move too much to be justified by dividends"
An ex-post rational real common stock price series, formed as the present value of subsequent detrended real dividends was found to be a very stable and smooth series when compared with the actual detrended real stock price series. An efficient markets model which makes price the optimal forecast of the ex-post rational price is inconsistent with this data if the long-run trend of real dividends is assumed given. To reconcile the data with the efficient markets model, one must assume that the market expected real dividends deviate from their long-run trend much more than they did historically...


And also of Ben Graham's Mr. Market analogy:
http://buffettpedia.com/tag/warren-buff ... mr-market/
Benjamin Graham, in his parable about Mr Market, said: “Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Everyday he tells you what your interest is worth and further offers to buy you out or sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes to you seems to you a little short of silly.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

GLState
Posts: 115
Joined: Wed Feb 15, 2017 10:38 am

Re: Why do stock prices move more while the market is open?

Post by GLState » Sat May 06, 2017 12:12 pm

SPY rather than ^GSPC



for the time period of 2007 to yesterday, using SPY, I get:

annualized return Market Open - 2.35%

annualized return Market Closed - 2.82%



Image
Last edited by GLState on Sat May 06, 2017 3:52 pm, edited 3 times in total.

User avatar
Pajamas
Posts: 3645
Joined: Sun Jun 03, 2012 6:32 pm

Re: Why do stock prices move more while the market is open?

Post by Pajamas » Sat May 06, 2017 12:21 pm

I think if you take a more granular look at the movement of stock prices, you will see increased volume and price volatility just after the markets open and just before they close. The opening trading reflects what has happened since the markets closed, and the closing trading is influenced by what is expected to happen while they are closed.

It would also be interesting to look at oil and gold prices around the clock as there are very active markets for them around the globe whereas even large U.S.-based international corporations tend to have a market concentrated in the U.S. and so activity in their stocks is concentrated during U.S. market hours.

To some degree, what you are asking is similar to asking why we only eat when we are awake even though our bodies burn calories around the clock. The answer to that is because we eat when we are awake, and the answer to your question is that stock prices move more because the markets are open.

User avatar
gordoni2
Posts: 194
Joined: Wed Aug 15, 2007 12:20 am
Contact:

Re: Why do stock prices move more while the market is open?

Post by gordoni2 » Sat May 06, 2017 4:26 pm

OP here.
GLState wrote:SPY rather than ^GSPC
Thank you! I think you hit the nail on the head. I get similar results to you when I switch to SPY, the S&P 500 ETF.



Image



My original chart was based on ^GSPC, the S&P 500 index. My best guess is that the reported opening price for ^GSPC is not meaningful. Lesson learned.

GLState
Posts: 115
Joined: Wed Feb 15, 2017 10:38 am

Re: Why do stock prices move more while the market is open?

Post by GLState » Sat May 06, 2017 6:05 pm

I also used GSPC and MSFT and got the same results as you did. I think we're missing something in the way we were creating the graphs. Overnight plus Intraday returns should sum to our total returns.



I created a histogram of overnight and intraday returns for GSPC. The overnight and intraday movement seem similar.



Image

User avatar
jhfenton
Posts: 2629
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Why do stock prices move more while the market is open?

Post by jhfenton » Sat May 06, 2017 6:40 pm

I didn't realize that you were using index data in the first chart. That's the problem there. The index doesn't actually trade overnight, and many of the constituents won't trade much overnight. I wouldn't trust the opening value calculated for the index. It appears to be anchored to the previous day's close.

SPY, on the other hand, does trade actively overnight. And GLState's chart with SPY looks much more like what I would expect: daytime is a bit more volatile, but roughly equal portion's of market movement happen during and outside primary market trading hours.

GLState
Posts: 115
Joined: Wed Feb 15, 2017 10:38 am

Re: Why do stock prices move more while the market is open?

Post by GLState » Sat May 06, 2017 7:24 pm

The index doesn't "trade" overnight but the effects of news, earnings, etc should still be reflected in the difference between the previous day's close and the current day's open. In the stock's and ETF's that pay dividends, we are not taking into account those dividends...so, that is a problem when trying to show the separate cumulative return of the overnight and intraday. I think any dividend payments coming out of the overnight returns, skew the returns toward negative. And the current day's "open" is only a single point, and may not take in the overnight action completely.

User avatar
jhfenton
Posts: 2629
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: Why do stock prices move more while the market is open?

Post by jhfenton » Sat May 06, 2017 7:33 pm

GLState wrote:The index doesn't "trade" overnight but the effects of news, earnings, etc should still be reflected in the difference between the previous day's close and the current day's open. In the stock's and ETF's that pay dividends, we are not taking into account those dividends...so, that is a problem when trying to show the separate cumulative return of the overnight and intraday. I think any dividend payments coming out of the overnight returns, skew the returns toward negative.
You would think that, but, based on the chart, overnight news clearly is not being reflected in ^GSPC at the open, whereas it is in SPY.

Post Reply