We propose a one-factor model that summarizes the cross-sectional variation in expected night-minus-day (NMD) stock returns. Our constructed pricing factor - the NMD returns on a high Sharpe ratio NMD trading strategy - has substantial exposure to the dominant common risks in the NMD return space, consistent with the absence of near-arbitrage opportunities. Furthermore, the factor premium is related to retail trading demand at the market open and the required returns from liquidity provision. Our findings are consistent with an economic equilibrium in which liquidity providers require compensation for accommodating sentiment-driven demand.
Keywords: Night-minus-day returns, liquidity provision, limits-to-arbitrage, retail trading
JEL Classifications: G12, G14, G23