U Disappeared: Indexing and the Shift of Diurnal Patterns

49 Pages Posted: 12 Dec 2019

See all articles by Wenxi Jiang

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: November 26, 2019

Abstract

We find that the well-documented U-shaped diurnal pattern of stock liquidity does not hold in recent years: stocks' bid-ask spread appears to decrease, not increase, towards the closing of the trading day. This pattern shift is driven by the rise of index-tracking investors, who need to trade at the closing price to minimize tracking errors. The sharply increased trading from passive indexers improves stock liquidity at the close of trading. We find that stocks with high index fund ownership tend to have a higher trading volume, smaller bid-ask spreads, and lower price volatility over the last 5-minute trading window relative to its intraday average, compared to stocks held less by index funds. Causal evidence is established by exploiting the switches between Russell 1000/2000 stock indexes. Last, we discuss the implications to market efficiency and the cost of indexing.

Keywords: diurnal patterns, indexing, intraday liquidity, price efficiency

JEL Classification: G10, G14

Suggested Citation

Jiang, Wenxi and Yao, Chen, U Disappeared: Indexing and the Shift of Diurnal Patterns (November 26, 2019). Available at SSRN: https://ssrn.com/abstract=3493513 or http://dx.doi.org/10.2139/ssrn.3493513

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong ( email )

Room 1250, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

Chen Yao (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, N.T.
Hong Kong
852 39433215 (Phone)

HOME PAGE: http://sites.google.com/site/chenyaosite/research

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