On the pricing of overnight market risk

  • Patrizia Perras
  • Niklas WagnerEmail author


This paper addresses the relation between market risk and expected market returns under periodic trading breaks. We propose a model where asset prices are driven by a diffusive process that operates during the trading day and a separate process that captures overnight price changes. Our empirical analysis shows that both components are important in explaining the equity market risk premium. Trading breaks entail a lack of market functionality and liquidity, and our results reveal that investors ask for a premium to hold the market portfolio overnight. Considering additional state variables in the model, we find that uncertainty risk and illiquidity risk are both significantly priced as well.


Dynamic asset pricing Trading breaks Equity premium Diffusion premium Overnight jump premium 

JEL Classification

G12 C51 



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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Department of Business and EconomicsUniversity of PassauPassauGermany

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