Older people among my readers will remember the time when there was – for a while – a discussion about how the US stock market had significantly higher returns between yesterday’s close and today’s open (when there were no trades at all) than during the day. Those were the innocent days of an era long gone, aka 2018, when we were all naïve and enthralled by a bull market that couldn’t be derailed by anything.

This effect was so promising that it even led to the launch of the Nightshares S&P 500 ETF in June 2022 – a product that was so successful that it was liquidated in in August 2023. As I wrote shortly after the launch of these ETFs, the finding of an overnight return in the S&P 500 was likely a statistical fluke because no such effect could be seen in the UK or Europe.

I promise it wasn’t my fault that the product failed.

Indeed, a new study by Thomas Perreten and Martin Wallmeier shows that the effect disappeared after the pandemic. What makes the study interesting, though, is that they seem to find why the effect existed in the US in the first place: Hype.

They noticed that stocks with large trading volume just after markets opened were the main driver of the overnight effect. For the uninitiated, trading volumes are heavily concentrated during the last hour of the day. Institutional investors typically want to trade when liquidity is highest which means they tend to wait until the end of a trading day to execute their orders. This becomes a self-fulfilling prophecy. Because big institutions focus their trading on the last hour of the day, this is where volume is highest and this is when other institutions want to trade in the future as well.

But some stocks buck the trend and have a U-shaped trading volume with large volume both in the first hour and the last hour of the day, as exemplified by AMD (in contrast to Ametek) in the chart below.

U-shaped vs. L-shaped volume patterns

Source: Perreten and Wallmeier (2025)

If you group portfolios by the ratio of trading volume in the first vs. the last hour of the day you can reproduce the same outperformance that you get in the classic overnight effect.

Performance of portfolio by volume patterns replicate the overnight effect

Source: Perreten and Wallmeier (2025)

So, which stocks have this suspicious U-shaped trading pattern? One clue is given by the two companies used to demonstrate the volume pattern above. I bet most readers will know AMD, the semiconductor company, but hardly anyone will have heard of Ametek (honestly, I had to look up what they did myself), even though it is a large company with a market cap of c.$40bn, about the same as Adidas and mining giant Anglo American.

The study found that stocks that generated a lot of investor attention, both from retail investors and institutions alike saw their trading volume rise significantly at the market open in reaction to overnight news. And as books filled pre-open by these eager investors in hype stocks, they moved prices artificially higher at the open and created this effect.

This can explain why there never was an overnight effect in the UK and Europe. We simply don’t have that many hype stocks so the few hype stocks that show this effect simply become drowned out by an otherwise more rational market.

And it can explain why the overnight effect has disappeared since the pandemic. Once the pandemic was over, two things happened. Retail investors who had lots of time to trade in lockdown are now out and about (or trading in crypto, but that is another story) and since 2022, while there have been hypes in US stocks like AI, markets are much more in the grip of macro and geopolitical events which drown out the hype stocks.