A deep dive into the Overnight Returns vs Intra Day Returns of the S&P500 Sector ETFs

This is from a talk I gave at r/finance 2016.

To start, I define the Overnight Effect as buying at the close and selling at the open, and the intraday as buying at the open and selling at the close.

I applied the above strategy using the 9 sector SPDRs and assuming 2bps roundtrip transaction cost.
The plot with XLF is shown above (Financial Sector SPDR).

First and foremost let’s look at the average returns (in % so 0.04 is 4 bps).

As we can see the overnight effect beats the intraday for almost every instrument giving some indication of a  potential risk premium.

Let’s look at the Sharpe Ratios of the effect on the various instruments.

Again even after adjusting for volatility risk the overnight beats the intraday and in some cases the buy and hold.

Looking at the maximum drawdowns

Again, the overnight draws down less than the intraday and the buy and hold.

Let’s look at volatility

Logically the Overnight has the smallest volatility as the holding time is less than the buy and hold.

After all of that performance analysis let’s run a Kolmogorov-Smirnov test to see if the two strategies have different return distributions.

As we can see it’s fairly clear that the two return streams come from different distributions which puts another tradeable instrument on the table.