Intraday Stock Returns, Time-Varying Risk Premia, and Diurnal Mood Variation

Abstract

Previous papers on intraday and interday stock transactions have documented a variety of systematic patterns in spreads, volumes, returns, and returns volatility. Several theoretical models have also been proposed to explain the observed patterns, but none have fully explained the movement of returns during the course of the day. In this paper, I consider a mechanism by which intraday returns may vary in a systematic manner as a result of behavioral factors rooted in the psychology of depression. By surveying past studies in finance, I find evidence consistent with a close relationship between intradaily variation in human sentiment and patterns in intraday stock returns. In exploring this explanation, I find hourly returns do not follow the U-shaped pattern conventionally believed to hold for intraday returns. Instead, I find returns in the morning significantly exceed those in the afternoon across a variety of time periods and datasets, a novel discovery consistent with the behavioral explanation of returns.