Is Risk Higher during Non-Trading Periods? The Risk Trade-Off for Intraday versus Overnight Market Returns

36 Pages Posted: 12 Sep 2014 Last revised: 24 Jun 2015

Date Written: May 18, 2015

Abstract

We study the magnitude of tail risk --- particularly lower tail downside risk --- that is present in intraday versus overnight market returns and thereby examine the nature of the respective market risk borne by market participants. Using the Generalized Pareto Distribution for the return innovations, we use a GARCH model for the conditional market return components of major stock markets covering the U.S., France, Germany and Japan. Testing for fat-tails and tail index equality, we find that overnight return innovations exhibit significant tail risk, while intraday innovations do not. We illustrate this volatility versus tail risk trade-off based on conditional Value-at-Risk calculations. Our results show that overnight downside market risk is composed of a moderate volatility risk component and a significant tail risk component. We conclude that market participants face different intraday versus overnight risk profiles and that a risk assessment based on volatility only will severely underestimate overnight downside risk.

Keywords: market risk, tail risk, downside risk, value-at-risk, intraday returns, overnight risk, stock markets, extreme returns, tail index

JEL Classification: C13, C22, G10, G21

Suggested Citation

Riedel, Christoph and Wagner, Niklas F., Is Risk Higher during Non-Trading Periods? The Risk Trade-Off for Intraday versus Overnight Market Returns (May 18, 2015). Available at SSRN: https://ssrn.com/abstract=2494387 or http://dx.doi.org/10.2139/ssrn.2494387

Christoph Riedel

University of Passau ( email )

Innstrasse 29
Passau, 94032
Germany

Niklas F. Wagner (Contact Author)

Passau University ( email )

Innstrasse 27
Passau, 94030
Germany

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