Overnight Trading and Price Discovery over the Course of a Trading Day: Evidence from Stock Index Futures in Korea

Abstract This paper investigates the effect of overnight trading on the price discovery process over the course of a trading day in the Korean stock index futures market. The paper uses Trade and Quote data on nearest‐to‐maturity KOSPI 200 futures contracts from 2 January 2009 to 31 March 2011 and finds the following results. We find evidence that overnight trading contributes significantly to price discovery and, as a result, accelerates the process, and improves the efficiency, of price discovery. We also find evidence that 26.27% of the entire day's price discovery occurs during overnight trading by impounding private information as well as public information. Altogether, our results provide insights that the futures market serves as a price discovery vehicle for the cash index where the cash market closes, and that futures trades during overnight trading play an important role in price discovery, as they aggregate investors' private information about the fundamental values of the cash index.