Method
Rule / pseudocode
_A long line of research (Cooper, Cliff & Cooper; Lou, Polk & Skouras) finds equity index gains accrue disproportionately overnight, possibly from overnight risk premium / order imbalance at the open._
Out-of-sample equity curve
Out-of-sample performance
Hypothesis
On SPY, holding only overnight (buy at close, sell at next open) earns a positive risk-adjusted return that survives transaction costs, while the complementary intraday segment does not.
Method
Instrument: SPY
Results
Out-of-sample Sharpe was -1.16, versus -1.56 in-sample. A bootstrap test returned p = 1.000 (not significant). Walk-forward Sharpe stayed positive in 0 of 5 folds. Worst out-of-sample drawdown was -67.15%.
Analysis
SPY daily data (5,384 trading days, 2005-01-04 to 2026-05-29) was downloaded via yfinance with auto_adjust=False; raw Open and Close prices were adjusted for splits and dividends by applying each day's Adj Close / Close ratio uniformly to the Open. Overnight return is adj_open[t] / adj_close[t-1] − 1: one non-overlapping observation per trading session, continuously invested. The 70/30 chronological split gives an in-sample period from 2005-01-04 to 2019-12-20 (3,768 days) and an out-of-sample period from 2019-12-23 to 2026-05-29 (1,616 days). Round-trip costs of ten basis points are applied per night via apply_costs(), which at 252 trading nights per year implies roughly 25% per annum in friction alone.
The pre-cost overnight premium replicates cleanly across both halves. In-sample: pre-cost Sharpe 0.75, annualised return +7.8%. Out-of-sample: pre-cost Sharpe 0.64, annualised return +8.6%. There is no IS/OOS degradation in the raw signal — if anything the OOS annual return is marginally higher — consistent with the well-documented overnight-drift anomaly persisting through to 2026. The cost layer inverts the picture entirely: IS net Sharpe −1.56 (annualised −16.2%), OOS net Sharpe −1.16 (annualised −15.6%). The OOS equity curve falls from .00 at inception to approximately /bin/zsh.34 by May 2026, a capital loss of 66% over six-and-a-half years.
Five-fold walk-forward validation over the full dataset yields fold net Sharpes of −1.49, −1.64, −3.44, −0.59, and −1.51. Zero of five folds are positive (OOS consistency 0%). The spread across folds is explained by volatility regimes — fold 3 likely spans the 2020 COVID episode where intraday dislocations amplified losses — but no fold approaches breakeven net of costs. The combined walk-forward net Sharpe of −1.35 is nearly identical to the main OOS figure, confirming the result is not an artefact of the particular split date.
The corrected block-bootstrap p-value (1,000 simulations, block size 5, demeaned null — H0: zero edge) on the 1,616 OOS net returns is p = 1.00. The observed net Sharpe of −1.20 lies entirely to the left of the null distribution's 5th–95th percentile range (−0.55 to +0.72): virtually every simulated zero-edge series outperforms this strategy on Sharpe. This is the expected outcome when costs have reversed the sign of the returns. The prior run's p ≈ 0.49 was produced by a buggy bootstrap that resampled the raw positive-mean series without demeaning, causing the null distribution to be centred on the observed Sharpe rather than zero — a mechanically broken test that always returned p ≈ 0.5 regardless of whether any real edge was present.
REJECTED. The overnight-drift anomaly is empirically robust across the full 2005–2026 sample — a pre-cost OOS Sharpe of 0.64 and +8.6%/yr places this squarely in the established literature. The problem is structural: entering at the close and exiting at the following open constitutes one full round trip every trading night, and at ten basis points that amounts to roughly 25% per annum in friction, more than three times the gross premium. The strategy is unviable in this form. A credible path to harvesting the overnight premium would require eliminating the daily round trip — for example by holding a continuous long position in which the overnight period is cost-free passage of time, with the intraday bearish complement expressed separately via a funded overlay or a short-duration instrument.
Provenance
Synthesized from 1tngv2a, 1u8xcnt. Combines the 'is OHLC alone enough' question with the well-documented overnight (close-to-open) drift anomaly: a strategy that uses only open/close prices and is genuinely testable on free data.
Evidence
Walk-forward Sharpe by fold
---
_Generated by labs-algo-trading. Automated research — not financial advice. Backtests overfit; treat verdicts as hypotheses._