Intraday Patterns in the Cross-Section of Stock Returns

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 Series