Nifty Gaps

There is always a time alignment problem when working with global data. For example, Nifty closes a day ahead of the S&P for the same closing date. There are two ways to get around this “rolling close” problem:

  1. Shift up the the lagging data to align the times zones.
  2. Instead of using close-to-close, use open-to-close on the data that is ahead.

But how big a problem is this? If the model uses a weekly time-series, how much of a difference would trading on Friday close vs. Monday open make?

Gap Opens

Unfortunately, for the NIFTY, we can only use data from 2011 to analyze opening gaps (Why?) Be that as it may, are Monday opening gaps different from other trading-day gaps?

NIFTY gaps

NIFTY gaps table

MONDAY: gap on a regular Monday after a two-day weekend.
HOLIDAY: gap on a weekday that is not a Monday, but one that opens after a holiday.
DAY_1: gap on a regular day that is not a MONDAY and not a HOLIDAY.

What this tells us is that there is nothing special about a Monday open. On, average, it is just like any other day.

Close-to-Close vs. Open-to-Close returns

The next question is how much of a difference would it make if we traded at the close and held our position over the weekend vs. buying at the open on Monday?

Comparing Close-to-Close (c2c) vs. Open-to-Close (o2c) is tricky because the holding period of the latter is considerably shorter than the former. Nevertheless, here are cumulative returns of buying on Friday close and selling on Monday close vs. buying on Monday open and selling on Monday close:
Buying NIFTY on Friday close and selling on Monday close vs. buying on Monday open and selling on Monday close

What about holding over a holiday?
holding NIFTY over a holiday

And, lastly, holding overnight vs. over a single trading day:
holding NIFTY overnight vs. over a single trading day

The above charts indicate that there is a big difference in holding positions overnight vs. buying at the open.

Volatility at Open vs. Close

The opening and closing prices are computed prices. Actual traded prices could vary based on market conditions. The last question that needs to be answered before choosing between trading at the open vs. the close is how different is the market at the open vs. the close?

To answer this question, lets take the on-the-run NIFTY futures and plot the summary metrics of its returns over the first half-hour and the last half-hour of trading:
NIFTY first 30 minutes
NIFTY last 30 minutes

There seems to be no glaring difference. The drift between traded prices and the published open/close should be about the same whether you trade at the open or at the close.

Take-away

All things considered, there is a net benefit in not carrying over positions over the weekend. So, in theory, a global macro model using weekly time-series could be run over the weekend – positions opened on Monday at the open and closed on Friday at the close – and the “rolling close” problem can be ignored when trading the NIFTY.

Related: Trading turnover throughout the day
Code is on github.