SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Appendix 2: Open-To-Close vs. Overnight Volatility
This Appendix addresses the question of how high is volatility during trading hours
compared to the volatility when the market is closed, as reflected in the overnight return.
To address this question, we observed the S&P 500 futures price immediately after 9:30
AM and immediately prior to 4:00 each day. For each day t, we computed the overnight
return from 4:00 on day t-1 to 9:30 on day t (Rto) and the open-to-close return on day t
(Rtd). We then computed the ratio of the squared open-to-close return to the sum of the
two squared returns. This represents the relative contribution of the open-to-close return
to total variance, denoted OCV:
2
Rtd
OCV = .
R + R
In the extreme case where all price changes occur between 9:30 and 4:00 and the
overnight return is always zero, the OC metric would equal one. In the opposite case
where the price always remains constant between 9:30 and 4:00 and all price changes
occur overnight, the OC metric would equal zero. The metric was computed each day
then aggregated across days for each quarter from 1986 to 2008.
As indicated in Figure 11, the Open-to-Close Return typically represented around 60-
70% of total variance, with a slight downward trend over time.
Focusing on those quarters having abnormally high end-of-day volatility, some of these
quarters also had a low value for OCVs. In other words, during time periods that
experienced market turbulence, relatively more volatility occurred overnight. For
example, Figure 11 shows that Q4 of 1987, Q4 of 1997, and Q3 and Q4 of 2007 had
relatively low values of OCV. However, the OCV metric was not particularly low for Q3
or Q4 of 2008.
15
2
to
2
td
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SEC_OEA_FCIC_001816