While São Paulo sleeps: what research says about overnight spillovers between markets
Two classic studies of Tokyo, London and New York show how one market’s session turns up in the next market’s opening, and what that suggests for the Ibovespa open.
The question
Every weekday, B3 closes in the evening and reopens the next morning. In the hours between, the rest of the world keeps trading: Asian markets open and close, Europe starts its day and many global futures trade almost around the clock. When São Paulo opens, how much of that night is already in the price?
Two classic studies asked the same question for a pair of markets whose hours barely overlap: Tokyo and New York.
What the research found
Hamao, Masulis and Ng (1990) used daily opening and closing prices of the Tokyo, London and New York stock markets and asked whether price changes and volatility in one market carry over to the next market to open. In the years before the October 1987 crash, they found volatility moving from New York to Tokyo, from London to Tokyo and from New York to London, but not in the opposite directions.
Lin, Engle and Ito (1994) went a step further with intraday data. They split each market’s day into the trading session and the overnight gap, and found that the session return in one market was correlated with the overnight return (from close to the next open) in the other. In plain words: what New York does during its day shows up in Tokyo’s next opening, and the other way round.
Beyond that opening move, they found little lagged spillover in returns or volatility, which suggests that the next open absorbs most of the foreign news quickly. The links were not fixed either: in their data, Tokyo’s overnight response to New York’s session was no longer significant after the 1987 crash.
Food for thought for the Ibovespa open
The opening is where the night gets priced. If foreign news is absorbed mostly at the next open, the first minutes of a session carry much of the overnight adjustment. That is why an opening estimate looks at the opening itself, not at the whole day.
Trading hours matter. Tokyo and New York barely overlap, which makes the overnight channel easy to see. Brazil shares much of its trading day with New York, so the “night” for the Ibovespa is shorter and is filled mostly by Asia, Europe and markets that trade around the clock.
Relationships drift. Both studies found results that changed around 1987. A link that held in one period can weaken in another, so any forecast built on these ideas has to be checked, day after day, against what actually happened.
References
- Hamao, Y., Masulis, R. W. & Ng, V. (1990). Correlations in Price Changes and Volatility across International Stock Markets. The Review of Financial Studies, 3(2), 281–307.
- Lin, W.-L., Engle, R. F. & Ito, T. (1994). Do Bulls and Bears Move Across Borders? International Transmission of Stock Returns and Volatility. The Review of Financial Studies, 7(3), 507–538.
Summaries are written in our own words. The studies cited do not evaluate or endorse Up or Down BR. Not investment advice.
All research notes