How (in)efficient is after-hours trading?

Abstract

In this paper we analyze US stock market after-hours trading. This is a trading outside the regular trading hours of 09:30-16:00. During this time the market is thinly traded and the possibility of price (in)efficiency arises. Price spikes up or down sometimes reaching several percent can be observed. This pattern can be exploited by a simple automated trading strategy that buys low if market drops and closes the position high on the next day when the market reopens. An empirical study using the most liquid stocks and exchange traded funds listed in NASDAQ and NYSE exchanges for the years 2000 to 2012 is conducted. We create a portfolio of ~400 automated trading strategies. The average portfolio performance is a 23 percent per annum with a Sharpe ratio of 4. This shows that prices are inefficient during after-hours trading in the US stock market. To test for significance we run an out-of-sample test from 2012 onwards.