Index-based Strategies and Intraday Stock Dynamics
51 Pages Posted: 9 Nov 2020 Last revised: 15 Jul 2022
Date Written: June 21, 2020
We investigate how index-based strategies affect intraday stock dynamics using a large high-frequency data set of S&P 500 stocks (9.3 billion observations) and estimators that are efficient in the high-frequency setting. Informative intraday patterns are found. In the recent decade, trading volume tilts toward market end; stock correlation increases during the day; cross-sectional beta dispersion decreases. These patterns can be explained by a ``firm-specific open, index-based close'' trading profile, which is based on time-varying informational shocks and trading demands from index-based strategies. We provide further evidence for this mechanism, including a market impact model that generates the observed patterns.
Keywords: market microstructure, index-based investing, intraday stock dynamics, high-frequency estimation, big data
JEL Classification: G11, G12
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