Pattern Of Short-Term Volatility Accentuation Within The Trading Day: An Investigation Of The U.S. And European Equity Markets

Abstract

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.

Day Of The Week Effects In Intra-Day Volatility Patterns Of Equity Markets: A Study Of US And European Stock Markets

“…Especially for the London Stock Exchange, opening and closing volatility is particularly more accentuated on Mondays and Fridays respectively. This result is consistent with Ozenbas (2006) where it is reported that the London Stock Exchange has the most pronounced U-shaped intra-day pattern of volatility among the same markets studied.…”

“…Intra-day patterns in volatility, and volume were first documented by Wood, McInish and Ord (1985), Jain and Joh (1988) and Harris (1986). Subsequently, this area has been investigated by other academic studies including Madhavan et al (1997) and Ozenbas (2006). Generally, these studies find a U-shape in volume and volatility across the markets studied.…”

Intra-day Trading Volume Patterns Of Equity Markets: A Study Of US And European Stock Markets

“…A study of volatility patterns in the five markets included in the current study can be found at Ozenbas (2006).…”

“…For instance, Ozenbas (2006) shows that opening half-hour volatility in the London Stock Exchange is extremely accentuated, it is more than 3 times the average mid-day volatility. On the other hand, volume in the morning period in this market is the lowest among the five markets studied.…”

Analysis of Intra-Day Volatility under Economic Crisis Conditions

“…Similar findings were provided by Harju and Hussain (2006) who asserted that the European Indices FTSE 100, XDAX30, SMI and CAC40 followed a reverse J pattern which differed slightly to an L pattern. Also, Ozenbas (2006) asserted that the same was true for NASDAQ and NYSE, as well as, for the London Stock Exchange, the Deutsche Boerse and Euronext. In contrast to these findings, Syed Mujahid Hussain (2008) found a J shaped pattern in the DAX, for the period [2004][2005].…”