Intraday Variation in Cross-sectional Stock Comovement and Impact of Index-based Strategies

Abstract

We investigate how comovement of S&P 500 stocks changes during a day using a large high-frequency dataset and estimators that are robust under microstructure noise and asynchronicity. We find that, in 2011 to 2021, the stock correlation increases substantially throughout the trading session, while the cross-sectional beta dispersion decreases concurrently. Thus, S&P 500 stocks exhibit stronger comovement near the market close. The time-varying comovement can be explained by the intraday variation in the composition of index-based and firm-based order flows. A cross-section market impact model with time-varying demand from single-stock and index investors generates the intraday patterns we observe.

Keywords: market microstructure, index-based investing, intraday stock dynamics, high-frequency estimation, big data

JEL Classification: G11, G12