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Intraday Patterns in the Cross-Section of Stock Returns
Steven L. Heston University of Maryland - Department of Finance Robert A. Korajczyk Northwestern University - Kellogg School of Management Ronnie Sadka Boston College - Department of Finance and Department of Finance November 5, 2009 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 short-term return reversal is driven by two components: temporary liquidity imbalances lasting less than an hour, and bid-ask bounce. 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.
Keywords: Return periodicity, Market Microstructure JEL Classifications: G12, G14 Working Paper SeriesDate posted: June 17, 2009 ; Last revised: November 06, 2009Suggested CitationContact Information
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