The morning volatility uncertainty effect

 

There has been an increase in research on what happens between the close and the open, and from the open to the close, in asset markets. In the equity market, significant differences have been found between overnight returns and daytime returns. 

In the paper, “Early Birds Get the Vol; Morning Volatility Uncertainty and Variance Risk Premium”, the authors find that the volatility of the VIX or VVIX at 10 AM EST can strongly predict the next day’s asset return's variance. The authors mine the day to show that there is a significant risk premium that can be exploited. I have reservations about the results, but I’m interested in the finding that volatility shocks have a spillover effect on volatility the next day. 

Volatility shocks will have spillover effects that can be exploited.