Momentum investing and a tale of intraday and overnight returns: Evidence from Taiwan

Abstract

The Taiwan stock market has been widely documented as a remarkable exception of the momentum effect. In this paper, we analyze whether the information contained in past intraday and overnight returns affects future stock returns in different ways. Specifically, we propose that investors tend to underreact to intraday information while overreact to overnight information. Accordingly, we construct two momentum strategies based on past intraday and overnight returns, namely the intraday momentum (IMOM) and overnight momentum (OMOM). We show that the IMOM strategy generates significantly positive returns while the OMOM strategy generates significantly negative returns, and that such phenomena exist up to one year. We further confirm that the IMOM profits are induced by investor underreaction while the OMOM reversals are due to investors' price correction of initial overreaction. Finally, we show that a major advantage of the IMOM strategy is that its profitability is stable over time and is less prone to the momentum crashes.