Are there patterns to intraday stock returns and, if so, are they exploitable? In their March 2008 paper entitled “Intraday Patterns in the Cross-Section of Stock Returns”, Steven Heston, Robert Korajczyk and Ronnie Sadka examine the intraday behavior of stock prices. Using return data for 13 half-hour intervals during the trading day for all NYSE-listed stocks over the decimalized period of 2001-2005, they conclude that:
- Over an interval of one calendar day, stock returns tend to first reverse and then rebound on a 13-hour (one trading day) cycle.
- This 13-hour (one trading day) cycle persists for many trading days (i.e., at 13 hours, 26 hours, 39 hours, 52 hours, 65 hours…). In general, temporary stock price pressure reverses at practically all future intraday intervals other than 13 hours. Trading volume has a similar pattern.
- The daily return cycle is more pronounced for the first and last half-hours of the trading day.
- This cycle is not related to firm size, systematic risk premiums, inclusion in the S&P 500 index or calendar effects such as month-of-the-year, day-of-the-week or turn-of-the-month.
- Hedge strategies seeking to exploit the daily cycle lose money after paying the bid-ask spread, but frequent traders acting for other reasons may benefit from timing trades accordingly.
In summary, traders may be able to shave a few basis points off trading costs by timing buys (sells) based on a tendency for exact daily recurrence of recent intraday lows (highs).
