Index-based Investing and Intraday Stock Dynamics

43 Pages Posted: 9 Nov 2020

See all articles by Yiwen Shen

Yiwen Shen

Columbia Business School - Decision Risk and Operations

Meiqi Shi

University of California, Berkeley - Haas School of Business

Date Written: June 21, 2020

Abstract

We investigate how the growth of index-based investing impacts the intraday stock dynamics using a large high-frequency dataset, which consists of 1-second level trade data for all S&P 500 constituents from 2004 to 2018. We estimate intraday trading volume, volatility, correlation, and beta using estimators that are statistically efficient under market microstructure noise and observation asynchronicity. We find the intraday patterns indeed change substantially over time. For example, in the recent decade, the trading volume and correlation significantly increase at the end of trading session; the betas of different stocks start dispersed in the morning, but generally move towards one during the day. Besides, the daily dispersion in trading volume is high at the market open and low near the market close. These intraday patterns demonstrate the implication of the growth of index-based strategies and the active-open, passive-close intraday trading profile. We theoretically support our interpretation via a market impact model with time-varying liquidity provision from both single-stock and index-fund investors.

Keywords: index-based investing, intraday stock dynamics, high-frequency data, efficient estimation

JEL Classification: G11, G12

Suggested Citation

Shen, Yiwen and Shi, Meiqi, Index-based Investing and Intraday Stock Dynamics (June 21, 2020). Available at SSRN: https://ssrn.com/abstract=3696124 or http://dx.doi.org/10.2139/ssrn.3696124

Yiwen Shen (Contact Author)

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

Meiqi Shi

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
434
Abstract Views
1,600
rank
80,211
PlumX Metrics