Essays on Intraday Stock Return Predictability

Abstract

The thrust of this thesis is to shed light on the intraday predictability of stock returns and its association with market microstructure and behavioural biases of traders. The first essay looks into an intraday effect of return continuation, namely intraday time series momentum (ITSM), in an international setting. Employing high-frequency trading data, we show that ITSM is economically sizeable and statistically significant both in- and out-of-sample in most of the 16 developed markets in our sample. To obtain a deeper understanding of the drivers behind the phenomenon, we propose four hypotheses based on existing theories of market microstructure and investor behaviour.

We empirically test the hypotheses in both cross-sectional and time series dimensions, finding that ITSM is stronger when liquidity is low, volatility is high, and new information is discrete. The evidence suggests that the ITSM is driven by both market microstructure and behavioural factors.

In the second essay, we turn our attention to the intraday cross-sectional predictability of stock returns, again in an international setting. Portfolio sorts and Fama-Macbeth regressions show that the first half-hour return and the first half-hour volatility have strong cross-sectional predictability on the last half-hour return, both economically and statistically. Portfolios that exploit the predictability of these two intraday characteristics produce positive and statistically significant alphas when regressed against passive benchmarks, suggesting remarkable economic gains. A comparison of our crosssectional portfolios and a strategy based on the intraday time series momentum (ITSM) shows that our strategies provide extra benefit to ITSM. This chapter contributes to the recent growing literature on intraday return predictability and asset pricing.

Finally, the third essay is concerned with the dynamic overnight-intraday return relationship and intraday investor heterogeneity. We find that there exists a significant reversal effect at the market open that converts to the momentum documented in Gao et al. (2018) at the market close. More importantly, we show that the significance of the opening reversal is almost entirely from days with negative overnight returns whereas that of the closing momentum is mainly from days with positive overnight return days The asymmetric overnight-intraday return relationship on the two types of days implies heterogeneity in intraday traders. A closer examination of the opening reversal shows that the effect is stronger on days with larger overnight volatility and trade size, and over periods of financial crisis, recessions, and greater uncertainty. Practically, we document strong economic significance of strategies that are based on the opening reversal.

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Identifiers

ORCID for Simon Wolfe: orcid.org/0000-0001-9815-9535

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