The paper examines intra-day share price volatility over the year 2000 for five market centres: the New York Stock Exchange, Nasdaq, the London Stock Exchange, Euronext Paris and Deutsche Börse. In each of these markets, we observe a U-shaped intra-day volatility pattern, a particularly sharp spike for the opening half hour, and a general level of intra-day volatility that is accentuated vis-à-vis volatility over longer differencing intervals, e.g. daily and weekly periods. We suggest that the volatility accentuation is attributable to spreads, market impact, price discovery and momentum trading -all of which are either trading costs or exist because of trading costs. Because the magnitude of trading costs depends in part on *We are most grateful to Instinet for having provided funding that facilitated the production of this paper. Ozenbas is also grateful to the Nasdaq Educational Foundation for a Nasdaq Dissertation Fellowship that helped to support this work. The paper has benefited greatly from the insightful comments of two anonymous referees and the editor, Benn Steil. We thank Dorit Zeevi-Farrington for the comments, assistance and encouragement she has provided. We thank Pankaj Jain for insightful comments. We thank Maurice Anslow, Antoinette Colaninno and David Arcement for the support and assistance they have given. market design, we also suggest that a link exists between intra-day volatility and market structure, and that market quality/efficiency on both sides of the Atlantic could be improved.
Trading friction leads into accentuated stock price volatility over the short term. As such, short-term accentuated volatility can be viewed as symptomatic of a market with increased inefficiencies in the price discovery process. If price discovery is marked by price swings, runs and reversals, then short period (intra-day) volatility is heightened in that market. In this study, we use return series with various differencing intervals that are as short as half-hour and as long as two weeks to investigate the short-term volatility accentuation in five different equity markets: the Nasdaq Stock Market and the New York Stock Exchange in the US, and the London Stock Exchange, Deutsche Boerse and Euronext Paris in Europe. In all these markets, we investigate the individual stocks that make up a major index during the calendar year 2000. Variance-ratio statistics are employed to investigate the quality of these five markets. Results confirm an intra-day reverse J-shaped pattern of half-hour volatility in these markets. The evidence also suggests an accentuation of volatility during longer periods, such as 24-hour intervals. This accentuation appears to subside when we extend our differencing interval to longer periods such as one-week or two-week returns.
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