U-shaped Intraday Pattern Research Articles

Modeling aggressive market order placements with Hawkes factor models.

Price changes are induced by aggressive market orders in stock market. We introduce a bivariate marked Hawkes process to model aggressive market order arrivals at the microstructural level. The order arrival intensity is marked by an exogenous part and two endogenous processes reflecting the self-excitation and cross-excitation respectively. We calibrate the model for a Shenzhen Stock Exchange stock. We find that the exponential kernel with a smooth cut-off (i.e. the subtraction of two exponentials) produces much better calibration than the monotonous exponential kernel (i.e. the sum of two exponentials). The exogenous baseline intensity explains the U-shaped intraday pattern. Our empirical results show that the endogenous submission clustering is mainly caused by self-excitation rather than cross-excitation.

U Disappeared: Indexing and the Shift of Diurnal Patterns

We find the well-documented U-shaped intraday patterns of stock liquidity, volume, and price volatility for the U.S. stock market have disappeared. Bid-ask spreads decrease, not increase, toward the close of the trading day; trading volume disproportionally concentrates in the last five minutes (over 20%). The rise of index-tracking investment provides one explanation. To avoid tracking errors, index funds tend to trade near the close. The clustered trading by uninformed indexers improves stock liquidity but deteriorates price informativeness preceding the close. We show evidence by exploiting the variations in stocks’ index fund ownership and switches between the Russell 1000/2000 stock indexes.

Common deviation and regime-dependent dynamics in the index derivatives markets

We analyze high-quality intraday data for KOSPI 200 futures and options to examine a common deviation and regime-dependent price dynamics in the index derivatives markets according to reliability of the common deviation. We find common deviation in the futures and options markets. In terms of the dynamics of asset prices and trading volumes, the linkage between the derivatives (i.e., futures and options) markets is stronger than the relationship between the underlying stock market and the derivatives markets. Whereas the deviations between the derivatives markets and the stock market exhibit an inverted U-shaped intraday pattern, the pattern of the deviation between futures and options markets is relatively flat. The deviations between the derivatives markets and the stock market are tied to trading activities in the same direction. When we identify regimes based on the difference between deviations in derivatives markets, defined as the relative deviation, the common deviation is significantly corrected only when the relative deviation is moderate. Although the stock market does not lead the derivatives markets when the relative deviation is mild, there is a bi-directional information flow between the derivatives markets and the stock market with extreme relative deviation. The result is still consistent in subsample analysis, though we find the informational effect of stocks becomes faint over time. A sudden change in the relative deviation is induced by options trading rather than futures trading.

On the Reverse U-Shaped Intraday Pattern of Volume and Volatility: Evidence from CSI 300 Index Futures Market

In contrast to the U-shaped intraday pattern of volume and volatility documented by previous literature, we document a reverse U-shaped intraday pattern of volume and volatility during the afternoon session in Chinese newborn CSI 300 index futures market. We analyze the dominant contracts of CSI 300 index futures with tick-by-tick data. We use ranged and realized measure of volatility, and we measure volume by dollar volume, share volume and number of trades. We find that no matter which measure is adopted, both trading volume and volatility of CSI 300 index future show a reverse U-shaped in the afternoon session.

Short sales, margin purchases and bid–ask spreads

This study examines intraday patterns of short sales, margin purchases, adverse selection, and bid–ask spreads in the order-driven market of the Taiwan Stock Exchange (TWSE). We find that both short sales and margin purchases exhibit a U-shaped intraday pattern in the TWSE. We further show that short sales and margin purchases have a significantly positive relationship with adverse selection and bid–ask spreads. We provide evidence that the U-shaped pattern of bid–ask spreads can be explained by short selling and margin trading activities.

Informed Trading During the Intraday: The Case of Short Sellers

Theory in Admati and Pfleiderer (1988) predicts that informed traders will concentrate their trading at the beginning and end of the trading day when markets are thick. Motivated by these predictions, we examine the trading behavior of informed short sellers during the intraday period. While our tests show that short-selling activity is highest at the beginning and end of the trading day, we find that contrarian short selling exhibits a reverse U-shaped intraday pattern. To the extent that contrarian trading represents informed short selling, this reverse U-shaped intraday pattern indicates that informed short sellers concentrate their trading during the middle of the trading day. We also examine the negative relation between current short activity and subsequent 15-minute returns. Results show that this negative relation is relatively constant across the intraday indicating that the informed short selling is not unusually high at the beginning and end of the trading day.

Concentrated Equilibrium and Intraday Patterns in Financial Markets

We introduce endogenous participation of market makers into a Kyle-type model with long-lived asymmetric information. In our model with plausible parameter values, the trading volume and price volatility show a U-shaped intraday pattern, often observed in actual financial markets. It will be shown that the pattern is caused not only by the trading behaviour of liquidity traders but also by that of market makers. Our findings shed new light on the stylized fact of the trade concentration at the opening and closing periods.

Intraday Patterns in Short Sales

We examine intraday patterns in short sales and document the trading activity of short sellers. We find a U-shaped intraday pattern in short sales across the trading day. This pattern is robust to controlling for short trade size, market capitalization, and institutional ownership. We also find a positive association between short selling and past returns across the trading day, and this result is more pronounced in the first and last half hours of the day. Meanwhile, a trading strategy based on intraday short sales generates the highest returns at the open of the trading day. Overall, the results suggest that high levels of short sales at the market open are attributed to strategic trading by informed short sellers. High levels of effective spreads and volatility at the open also support our findings.

Ghent Pathology 2011.

This study examines the intraday formation process of transaction prices and bid-ask spreads in theKOSPI 200 futures market. By extending the structural model ofMadhavan,Richardson, andRoomans (1997), I develop a unique cross-market model that can decompose spread components and explain intraday price formation for the futures market by using the order flow information from theKOSPI 200 options market, which is a market that is closely related to the futures market as well as considered to be one of the most remarkable options market in the world. The empirical results indicate that the model implied spread and the permanent component of the spread that results from informed trading tend to be underestimated without the inclusion of options market information. Furthermore, the results imply that trades of in-the-money options, which have high delta values, generally incur a more adverse information cost component (the permanent spread component) of the futures market than those of out-of-the-money options, which have relatively low delta values. Finally, I find that the adverse information cost component that is estimated from the cross-market model exhibits a nearlyU-shape intraday pattern; however, it sharply decreases at the end of the trading day.

Intraday price formation and bid-ask spread components: A new approach using a cross-market model

This study examines the intraday formation process of transaction prices and bid–ask spreads in the KOSPI 200 futures market. By extending the structural model of Madhavan, A., Richardson, M., and Roomans, M. (1997), we develop a unique cross-market model that can decompose spread components and explain intraday price formation for the futures market by using the order flow information from the KOSPI 200 options market, which is a market that is closely related to the futures market as well as considered to be one of the most remarkable options markets in the world. The empirical results indicate that the model-implied spread and the permanent component of the spread that results from informed trading tend to be underestimated without the inclusion of options market information. Further, the results imply that trades of in-the-money options, which have high delta values, generally incur a more adverse information cost component (the permanent spread component) of the futures market than those of out-of-the-money options, which have relatively low delta values. Finally, we find that the adverse information cost component that is estimated from the cross-market model exhibits a nearly U-shaped intraday pattern; however, it sharply decreases at the end of the trading day. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark

Intraday Stealth Trading: Which Trades Move Prices During Periods of High Volume?

Research documents a U-shaped intraday pattern of returns (Wood et al., 1985, and Harris, 1986). This paper examines which trade sizes drive the U-shaped pattern. We find that intraday price changes from larger trades exhibit a U-shaped pattern while prices changes from smaller trades show a reverse U-shaped pattern. We argue that price changes from smaller trades are higher during the middle of the day because informed investors break up their trades in order to disguise their information (Barclay and Warner, 1993) when intraday volume is low. Price changes from larger trades are likely higher at the beginning and end of the day because high volume allows informed investors to increase their trade size without revealing their information to the market (Admati and Pfleiderer, 1988). Consistent with our argument, we find that the relation between volume and price changes is increasing across trade sizes.

Informativeness of Order Flow: The Role of Institutions vs. Individuals

This paper uses a dynamic model of orders and stock prices, to assess the informativeness of order flows of individuals and institutions. Our unique transactions, orders and quotes dataset on the highly liquid order driven Taipei Stock Exchange, specifies the identity of traders, for limit and market order data for over 400 individual stocks. We suggest a new unit-informativeness measure which is independent of the volume of orders. We compare it to the relative informativeness measure of Hasbrouck (1991a, b). Because of their dominance in terms of trading volume, the relative informativeness metric implies that the individual's order flows are more informative than those of institutions. For institutional order flows, informativeness rises with company size, and has an inverse U-shaped intraday pattern. All such features are inverted when using our preferred unit informativeness measure.

Day-Of-The-Week Effect on Trading and Non-Trading Stock Market Returns in India: A Parametric and Non-Parametric Testing

The present study examines the Day-of-the-Week effect anomaly in the Indian equity market during the period of July 1997 to March 2006 using daily data of NSE Nifty and BSE Sensex. The Day-of-the-Week effect implies that the stocks return is not independent of the Day-of-the-Week in which they are generated. If such an anomaly exists, market participants can take advantage of the same and adjust their buying and selling strategies accordingly to increase their returns. Both parametric and non-parametric approaches are applied to detect the Day-of the- Week effect in both mean and volatility of returns. The results indicate that BSE starts upwards, declines in middle of the week and end downwards while NSE starts downward, upward in middle of the week and end downwards. The study reveals U-shaped intra-day pattern in price volatility in both the markets. The results also indicate differential pattern of movements in mean and variance of trading and non-trading returns across the weekdays. It is also observed that there is an improvement in the Day-of-the-Week anomaly during the period of January 2002 to March 2006.

Limit orders and the intraday behavior of market liquidity: Evidence from the Toronto stock exchange

This paper examines the intraday behavior of market liquidity on the TSE. It shows that spread follows U-shaped intraday pattern, depth displays opposite pattern, while volume is low at the open, stable during the day and increases at the close. The paper finds evidence that spread and depth are negatively correlated, suggesting that limit-order traders actively manage both price and quantity dimensions of liquidity to protect themselves from informed trades. Furthermore, it finds that there is price improvement on the TSE. Finally, it shows that liquidity is inversely related to volatility but directly related to volume.

What is the source of different levels of time-series return volatility? the intraday U-shaped pattern or time-series persistence

We use the NYSE industrial index, the NYSE utility index, and the NASDAQ industrial index to examine the relationship between short-run and long-run volatility. We establish that the NASDAQ index has substantially more daily volatility than the NYSE indices. The initial examination shows that the individual U-shaped intraday patterns of the two NYSE indices are roughly similar in both position and shape, while we find that NASDAQ U-shaped pattern is distinctively different in both position and shape. However, after controlling for conditional volatility in a GARCH model, the U-shaped intraday volatility patterns of all three indices are similar.

Limit orders and the bid-ask spread

We examine the role of limit-order traders and specialists in the market-making process. We find that a large portion of posted bid-ask quotes originates from the limit-order book without direct participation by specialists, and that competition between traders and specialists has a significant impact on the bid-ask spread. Specialists' spreads are widest at the open, narrow until late morning, and then level off. The U-shaped intraday pattern of spreads largely reflects the intraday variation in spreads established by limit-order traders. Lastly, the intraday variation in limit-order spreads is significantly related to the intraday variation in limit-order placements and executions.

The impact of tick size on intraday stock price behavior: evidence from the Taiwan Stock Exchange

This research examines the impact of tick size on intraday stock price behavior for stocks listed on the Taiwan Stock Exchange over the 2-year period of 1998–1999. The sample involves the same 80 firms that trade under the tick size of (New Taiwan Dollars) NT$0.1 and NT$0.5, respectively. The sample firms display a U-shaped intraday pattern of bid–ask spread, volatility, autocorrelation, and trading volume. The empirical results indicate that a larger tick size is associated with a wider bid–ask spread, larger volatility, and more negative autocorrelation. Moreover, a larger tick size is associated with a higher percentage increase of bid–ask spread and volatility in the middle of the trading period. Finally, the effect of tick size on trading volume is insignificant.

Intra-day periodicity and long-run volatility in short sterling futures

Research examining high-frequency financial data has suggested that volatility dynamics may be confounded by the existence of both a periodic pattern and long-memory volatility. Using five-minute sampled UK short sterling bond futures, this paper seeks to confirm the joint presence of such components. Our results provide evidence for both a U-shaped intra-day pattern and long-run dependence in volatility. Estimation of a component-Garch model confirms the presence of both long-run and short-run volatility dynamics, with half-life decay to a shock in the long-run component of 19 hours and short-run half-life decay of 37 minutes. Finally, our results suggest that taking both components into account improves the accuracy of volatility forecasts.

Characteristics of the order flow through an electronic open limit order book

We estimate and examine certain characteristics of the order flow through an electronic open limit order book, using order (not trade) data. In doing this, we bring out new evidence on order flow from a market with microstructure different from that of the NYSE. We find that the proportion of informed orders is less than 10%, lower than previous estimates. Informed traders choose smaller orders than uninformed traders, but do not materially differ in their choice of limit or market orders. The proportion of informed investors is similar between good and bad news days. Finally, there are U-shaped intraday patterns in order arrival, and the information content of the order flow appears to follow this pattern across the day.

Limit orders and the bid–ask spread

We examine the role of limit-order traders and specialists in the market-making process. We find that a large portion of posted bid–ask quotes originates from the limit-order book without direct participation by specialists, and that competition between traders and specialists has a significant impact on the bid–ask spread. Specialists’ spreads are widest at the open, narrow until late morning, and then level off. The U-shaped intraday pattern of spreads largely reflects the intraday variation in spreads established by limit-order traders. Lastly, the intraday variation in limit-order spreads is significantly related to the intraday variation in limit-order placements and executions.