Asset pricing: A tale of night and day

Abstract The capital asset pricing model (CAPM) performs poorly overall, as market risk (beta) is weakly related to 24-hour returns. This is because stock prices behave very differently with respect to their sensitivity to beta when markets are open for trading versus when they are closed. Stock returns are positively related to beta overnight, whereas returns are negatively related to beta during the trading day. These day-night relations hold for beta-sorted portfolios and individual stocks in the US and internationally as well as for industry and book-to-market portfolios and cash flow and discount rate beta-sorted portfolios. In addition to the change in slope of returns with respect to beta, the implied risk-free rate differs significantly between night and day. Consistent with this, returns on US Treasury futures differ significantly between night and day.