A Theory of Intraday Patterns: Volume and Price Variability

doi:10.1093/RFS/1.1.3

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A Theory of Intraday Patterns: Volume and Price Variability

Journal Article•DOI•

A Theory of Intraday Patterns: Volume and Price Variability

Anat R. Admati¹, Paul Pfleiderer¹•Institutions (1)

Stanford University¹

01 Jan 1988-Review of Financial Studies (Oxford University Press)-Vol. 1, Iss: 1, pp 3-40

TL;DR: In this paper, the authors developed a theory that concentrated trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders and provided a partial explanation for some of the recent empitical findings concerning the patterns of volume and price variability in intraday transaction data.

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Abstract: This article develops a theory in which concentrated-trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders. Our results provide a partial explanation for some of the recent empitical findings concerning the patterns of volume and price variability in intraday transaction data. In the last few years, intraday trading data for a number of securities have become available. Several empirical studies have used these data to identify various patterns in trading volume and in the daily behavior of security prices. This article focuses on two of these patterns; trading volume and the variability of returns. Consider, for example, the data in Table 1 concerning shares of Exxon traded during 1981.1 The U-shaped pattern of the average volume of shares traded-namely, the heavy trading in the beginning and the end of the trading day and the relatively light trading in the middle of the day-is very typical and has been documented in a number of studies. [For example,Jain andJoh (1986) examine hourly data for the aggregate volume on the NYSE, which is reported in the Wall StreetJournal, and find the same pattern.] Both the variance of price changes

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Journal Article•DOI•

ARCH modeling in finance: A review of the theory and empirical evidence

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Tim Bollerslev¹, Ray Yeutien Chou², Kenneth F. Kroner³•Institutions (3)

Northwestern University¹, Georgia Institute of Technology², University of Arizona³

01 Apr 1992-Journal of Econometrics

TL;DR: An overview of some of the developments in the formulation of ARCH models and a survey of the numerous empirical applications using financial data can be found in this paper, where several suggestions for future research, including the implementation and tests of competing asset pricing theories, market microstructure models, information transmission mechanisms, dynamic hedging strategies, and pricing of derivative assets, are also discussed.

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4,206 citations

Journal Article•DOI•

Investor Psychology and Security Market Under- and Overreactions

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Kent Daniel, David Hirshleifer, Avanidhar Subrahmanyam

01 Dec 1998-Journal of Finance

TL;DR: The authors proposed a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes.

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Abstract: We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors’ confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ~“momentum”!, short-run earnings “drift,” but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to ref lect all publicly available information. Some of the more pervasive anomalies can be classified as follows ~Appendix A cites the relevant literature!: 1. Event-based return predictability ~public-event-date average stock returns of the same sign as average subsequent long-run abnormal performance! 2. Short-term momentum ~positive short-term autocorrelation of stock returns, for individual stocks and the market as a whole!

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4,007 citations

Journal Article•DOI•

Disclosure, Liquidity, and the Cost of Capital

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Douglas W. Diamond, Robert E. Verrecchia

01 Sep 1991-Journal of Finance

TL;DR: In this article, the authors studied the causes and consequences of a security's liquidity, especially the effect of future liquidity on the security's current price-equivalently the effect on its required expected rate of return, its cost of capital.

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Abstract: This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making. THIS PAPER STUDIES THE causes and consequences of a security's liquidity, especially the effect of future liquidity on the security's current price-equivalently the effect on its required expected rate of return, its cost of capital. Under conditions that we identify, reducing information asymmetry reduces the cost of capital. Under other (less typical) conditions, this reduced information asymmetry can have the opposite effect. We use public disclosure of information as the means of changing information asymmetry, but the points are more general. Our model is related to those of Kyle (1985), Glosten and Milgrom (1985), and Admati and Pfleiderer (1988). They assume that there is unlimited risk bearing capacity devoted to market making, which implies that changes in future liquidity never influence a security's cost of capital.1 In contrast, we develop a model of trade in an illiquid market with limited risk bearing capacity of risk-averse market makers and examine the effects of private information on the incentives of market makers to provide risk bearing

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3,360 citations

Cites methods from "A Theory of Intraday Patterns: Volu..."

...Our model is related to those of Kyle (1985), Glosten and Milgrom (1985), and Admati and Pfleiderer (1988)....
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...Our model is related to those of Kyle (1985), Glosten and Milgrom (1985), and Admati and Pfleiderer (1988). They assume that there is unlimited risk bearing capacity devoted to market making, which implies that changes in future liquidity never influence a security's cost of capital....
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Posted Content•

Presentation Slides for 'Investor Psychology and Security Market Under and Overreactions'

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Kent Daniel¹, Kent Daniel², David Hirshleifer³, David Hirshleifer², Avanidhar Subrahmanyam⁴, Avanidhar Subrahmanyam⁵ - Show less +2 more•Institutions (5)

Columbia University¹, National Bureau of Economic Research², University of California, Irvine³, University of New South Wales⁴, University of California, Los Angeles⁵

01 Dec 1998-Social Science Research Network

TL;DR: This paper proposed a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes.

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3,303 citations

Journal Article•DOI•

The Economic Consequences of Increased Disclosure

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Christian Leuz, Robert E. Verrecchia¹•Institutions (1)

University of Pennsylvania¹

01 Jan 2000-Journal of Accounting Research

TL;DR: In this paper, the authors study German firms that have switched from the German to an international reporting regime (1AS or U.S. GAAP) and show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely, the bid-ask spread and trading volume behave in the predicted direction compared to firms employing the German reporting regime.

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Abstract: Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the United States is that, under current U.S. reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (1AS or U.S. GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firmsnamely, the bid-ask spread and trading volume-behave in the predicted direction compared to firms employing the German reporting regime.

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2,984 citations

Cites background from "A Theory of Intraday Patterns: Volu..."

...The relation between these proxies and the firm’s cost of capital is well established in theory (e.g., Stoll, 1978b; Glosten and Milgrom, 1985; Admati and Pfleiderer, 1988)....
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References

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Journal Article•DOI•

Continuous Auctions and Insider Trading

[...]

Albert S. Kyle

01 Nov 1985-Econometrica

9,341 citations

"A Theory of Intraday Patterns: Volu..." refers background or methods in this paper

...[Of course, the timing issue does not arise in models with only one trading period and is therefore only relevant in multiperiod models, such as in Glosten and Milgrom (1985) and Kyle (1985) .]...
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...Like Kyle (1984, 1985) and unlike Glosten and Milgrom (1985), orders are not constrained to be of a fixed size such as one share....
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...The trading model used in our analysis is in the spirit of Glosten and Milgrom (1985) and especially Kyle (1984, 1985)....
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...Issues related to the timing of informed trading, which are important in Kyle (1985), do not arise here....
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...This follows the approach in Kyle (1985) and in Glosten and Milgrom (1985).5 3 This assumption is reasonable since the span of time coveted by the T periods in this model is to be taken as relatively short and since our main interests concern the volume of trading and the variability of prices....
[...]

Journal Article•DOI•

Bid, ask and transaction prices in a specialist market with heterogeneously informed traders

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Lawrence R. Glosten¹, Lawrence R. Glosten², Paul Milgrom³•Institutions (3)

University of Chicago¹, Northwestern University², Yale University³

01 Mar 1985-Journal of Financial Economics

TL;DR: The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits as discussed by the authors, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity.

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5,902 citations

"A Theory of Intraday Patterns: Volu..." refers background or methods in this paper

...[Of course, the timing issue does not arise in models with only one trading period and is therefore only relevant in multiperiod models, such as in Glosten and Milgrom (1985) and Kyle (1985) .]...
[...]
...Like Kyle (1984, 1985) and unlike Glosten and Milgrom (1985), orders are not constrained to be of a fixed size such as one share....
[...]
...The trading model used in our analysis is in the spirit of Glosten and Milgrom (1985) and especially Kyle (1984, 1985)....
[...]
...This follows the approach in Kyle (1985) and in Glosten and Milgrom (1985).5 3 This assumption is reasonable since the span of time coveted by the T periods in this model is to be taken as relatively short and since our main interests concern the volume of trading and the variability of prices....
[...]
...The information structure in our model is simpler than Kyle (1985) and Glosten and Milgrom (1985) in that private information is only useful for one period....
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Journal Article•DOI•

A subordinated stochastic process model with finite variance for speculative prices

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Peter King Clark

01 Jan 1973-Econometrica

TL;DR: In this article, a general class of finite-variance distributions for price changes is described, and a member of this class, the lognormal-normal, is tested against previously proposed distributions for speculative price differences.

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Abstract: S. Bochner's concept of a subordinate stochastic process is proposed as a model for speculative price series. A general class of finite-variance distributions for price changes is described, and a member of this class, the lognormal-normal, is tested against previously proposed distributions for speculative price differences. It is shown with both discrete Bayes' tests and Kolmogorov-Smirnov tests that finite-variance distributions subordinate to the normal fit cotton futures price data better than members of the stable family.

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2,941 citations

"A Theory of Intraday Patterns: Volu..." refers result in this paper

...It is interesting to contrast our results in this section with those of Clark (1973), who also considers the relation between volume and the rate of information arrival....
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Journal Article•DOI•

Stock return variances: The arrival of information and the reaction of traders

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Kenneth R. French¹, Richard Roll², Richard Roll³•Institutions (3)

University of Chicago¹, Goldman Sachs², University of California, Los Angeles³

01 Sep 1986-Journal of Financial Economics

TL;DR: In this paper, the authors consider three explanations for the volatility of asset prices during exchange trading hours than during non-trading hours: public information which is more likely to arrive during normal business hours, private information which affects prices when informed investors trade, and pricing errors that occur during trading.

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1,740 citations

"A Theory of Intraday Patterns: Volu..." refers background or result in this paper

...Our analysis may also shed some light on the finding discussed in French and Roll (1986) that the variance of returns over nontrading periods is much lower than the variance of returns over trading periods....
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...While this effect may explain some of these findings, it is probably not sufficiently strong to account for the striking differences in variances reported in French and Roll (1986)....
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Journal Article•DOI•

A transaction data study of weekly and intradaily patterns in stock returns

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Lawrence Harris¹•Institutions (1)

University of Southern California¹

01 May 1986-Journal of Financial Economics

TL;DR: In this paper, the authors examined weekly and intradaily patterns in common stock prices using transaction data and found that negative Monday close-to-close returns accrue between the Friday close and the Monday open; for smaller firms they accrue primarily during the Monday trading day.

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855 citations

"A Theory of Intraday Patterns: Volu..." refers background in this paper

...[See, for example, Jain and Joh (1986); Harris (1986); Marsh and Rock (1986); and Wood, Mclnish, and Ord (1985).] In our model, prices are a martingale, so patterns in means do not arise....
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...[See, for example, Jain and Joh (1986); Harris (1986); Marsh and Rock (1986); and Wood, Mclnish, and Ord (1985)....
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...[See, for example, Jain and Joh (1986); Harris (1986); Marsh and Rock (1986); and Wood, Mclnish, and Ord (1985).] In our model, prices are a martingale, so patterns in means do not arise. This is due in part to the assumption of risk neutrality. [Williams (1987) analyzes a model that is related to ours in which risk aversion plays an important role and mean effects do arise....
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...[See, for example, Jain and Joh (1986); Harris (1986); Marsh and Rock (1986); and Wood, McInish, and Ord (1985).]...
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