How Index Funds Reshape Intraday Market Dynamics

64 Pages Posted: 12 Dec 2019 Last revised: 28 Sep 2022

See all articles by Wenxi Jiang

Wenxi Jiang

CUHK Business School, The Chinese University of Hong Kong

Siyuan Wu

The Chinese University of Hong Kong (CUHK)

Chen Yao

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

Date Written: September 26, 2022

Abstract

The rise of index funds reshapes stock market trading dynamics: to minimize tracking errors, they tend to execute trades near the market close. As index fund ownership increases, the clustered trading by uninformed indexers enhances underlying stock liquidity preceding the close, exhibiting higher volume and narrower spreads relative to the daytime average. While informed trades (e.g., short sales) as a result migrate toward the close, we find price informativeness deteriorates. We provide causal evidence by exploiting reconstitutions of the S&P500 and Russell 1000/2000 indexes. Evidence suggests that better liquidity but noisier prices before the close encourage long-term information acquisition.

Keywords: index fund, intraday stock liquidity, price informativeness, informed traders, information acquisition

JEL Classification: G10, G14

Suggested Citation

Jiang, Wenxi and Wu, Siyuan and Yao, Chen, How Index Funds Reshape Intraday Market Dynamics (September 26, 2022). Available at SSRN: https://ssrn.com/abstract=3493513 or http://dx.doi.org/10.2139/ssrn.3493513

Wenxi Jiang (Contact Author)

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

Room 1210, Cheng Yu Tung Building
Chinese University of Hong Kong
Shatin, NT 06520
Hong Kong

HOME PAGE: http://https://sites.google.com/site/jiangwenxi/

Siyuan Wu

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Chen Yao

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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