Intraday Patterns in the Cross-Section of Stock Returns
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Date: 10-29-2009
Start Time:
5:30pm
End Time: 7:00pm
Speaker: Steven L. Heston, University of Maryland - Department of Finance
Location: Park Avenue Plaza at 55 East 52nd Street 11th Floor
ABSTRACT
Motivated by the literature on investment flows and optimal trading, this paper examines intra-day predictability in the cross-section of stock returns. We find a striking pattern of return continuation at half-hour intervals that are exact multiples of a trading day, and this effect lasts for at least forty trading days. Changes in volume, order imbalance, volatility, and bid/ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that the well-known short-term return reversal is driven by two components: temporary liquidity imbalances lasting less than an hour, and bid-ask bounce. The results are consistent with persistent trading at particular trading intervals of the day. Thus, timing trades based on the observed periodicity can reduce execution costs significantly, on average, by the equivalent of a one-way effective spread of a typical algorithmic trade, and this cost reduction can be much larger at the beginning and end of the day.
BIO
Steve Heston is Associate Professor at the University of Maryland. He graduated with a BS double major in Mathematics and Economics from the University of Maryland, College Park in 1983. He attended the Graduate School of Industrial Administration and earned an MBA in 1985 followed by a PhD in Finance in 1990. He has held previous faculty positions at Yale, Columbia, Washington University, and the University of Auckland in New Zealand. He has worked in the private sector with Goldman Sachs in Fixed Income Arbitrage and in Asset Management Quantitative Equities. He is known for analyzing options with stochastic volatility and international stock risk.
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