Intraday Trading Patterns and Commonality in Liquidity

Abstract

A common thread in literature that connects liquidity commonality and intraday trading patterns lies in the potential sources of these two phenomena: inventory risk and asymmetric information. There is ample evidence in literature on trading patterns to suggest that both volume and return volatility are highest during the first and last half hours of a trading day. Thus, one would expect that liquidity commonality would be most concentrated during the intraday trading periods when the trading volume and return volatility are most intense. Therefore, we hypothesize that the degree of liquidity commonality is highest during these two trading periods. We present evidence in support of this hypothesis.

Keywords: Liquidity, commonality, U-shape, intraday trading

JEL Classification: G14, G17