Kristina Peterson’s article in the WSJ last week on intraday patterns got me thinking and the result is this brief research paper. There’s a significant amount of work I’d like to put into the paper, especially the preliminary analysis on volume correlation, but the results are interesting enough that I decided to publish a draft. You can read the abstract below and download the paper here.
In this brief research note, I explore recent patterns in intraday return and volume correlation between the S\&P 500 and sector indices, as represented by minutely data from Aug. 23 to Sep. 10 for the SPDR exchange-traded funds. Notably, there appears to be evidence of two previously unreported patterns in intraday correlation. First, there is a “U-shaped” trend in return correlation, characterized by higher correlation at open and close and lower correlation during mid-day hours. Second, volume correlation is marked by lower values in the morning and increasing values in the afternoon. In some cases, this trend even takes the infamous “hockey-stick” shape, exhibiting stable values in the morning but sharply increasing values in the late afternoon. To ensure that these patterns are not a function of the choice of correlation window size, I confirm that these patterns are qualitatively stable over correlation windows ranging from 10 minutes to 90 minutes. These findings indicate that non-time-stationary patterns exist not only for volume and volatility, as previously reported, but also for the correlation of return and volume between the market and sector indices. These results have possible implications for intraday market efficiency and for trading strategies that rely on intraday time-stationarity of return or volume correlation.
Bommarito, Michael James, Intraday Correlation Patterns between the S&P 500 and Sector Indices (September 16, 2010). Available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677915