An Examination of Stock Market Return Volatility During Overnight and Intraday Periods, 1964-1989

Abstract

This paper examines the variance of hourly market returns during . Results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter and is significantly greater for intraday versus overnight periods. Market variance is also shown to change significantly over time, rising after NASDAQ began in 1971, rising after trading in stock options began in 1973, falling after fixed commissions were eliminated in 1975, rising after trading in stock index futures was introduced in 1982, and falling after margin requirements for stock index futures became larger in 1988. WOOD, MCINISH, AND ORD (1985), Harris (1986), and McInish and Wood (1989) examine intraday stock returns over brief periods and find that market volatility is high near the open and close of the trading day. Market volatility also has been found to be greater during trading versus nontrading periods (French and Roll (1986)) and during open-to-open versus close-to-close periods (Amihud and Mendelson (1987)). This paper extends previous volatility studies by examining market variance on an hourly basis for the 1964-1989 period.1 Tests of the stability and ordering of market volatility are performed (a) across intraday hours, (b) between trading and nontradingwperiods, and (c) between open-to-open and close-to-close periods. Market volatility is also examined between dates of important structural changes in financial markets, such as the introduction of NASDAQ (1971), standardized stock options (1973), negotiable commissions (1975), stock index futures (1982), and increased margin requirements for trading in stock index futures (1988).The remainder of the paper is composed of three sections. Section I describes the data. Section II presents the hypotheses, methodology, and results. Section III summarizes the main findings of the paper.

Analysis of Intra-Day Volatility under Economic Crisis Conditions

“…However, their finding was not confirmed by the subsequent study of Harris (1986) who analysed data of the same market, using a 15 minutes interval. Lockwood and Linn (1990) provided, also, support evidence of the findings of Wood et al (1985) by analyzing hourly prices of the DJ Index, for the period 1964-1969.…”

“…L-shaped patterns were, also, identified among others by Harris (1986), Deniz et al (2002), Lam and Tong (1999) and Tang and Lui (2002). On the contrary, Wood et al (1985), Harris (1986), Lockwood and Linn (1990), Werner and Kleidon (1996), Ozenbas, Schwartz and Wood (2002) suggested a U-shaped pattern for DAX.…”

“…Following the majority of the past studies (Wood, McInish and Ord, 1985, Harris, 1986, Lockwood and Linn, 1990, Ozenbas, Schwartz and Wood, 2002, Tian and Guo, 2007, Werner and Kleidon, 1996 intra-day volatility was calculated as follows:  A stock market trading day was divided into intervals, of 5 minutes each.…”

“…Wood et al (1985), Harris (1986), Lockwood and Linn (1990), Werner and Kleidon (1996), Ozenbas, Schwartz and Wood (2002), Harju and Hussain (2006), also, found a U-shape while Syed M. (2008) argued that if the first two observations are removed then the first peak disappears.…”

The Intraday Pattern of Trading Activity, Return Volatility and Liquidity: Evidence from the Emerging Tunisian Stock Exchange

“…While inside the trading day, trading volume has remarkably declined. This U-shaped profile, according to Lee, Fok and Liu (2001), represents a global phenomenon, since several studies have revealed the presence of such intraday behavior as the works of Wood, McInish and Ord (1985), McInish and Wood (1990a), McInish and Wood (1992) and Lockwood and Linn (1990) respectively on the NYSE and the TSE. And the works of Chow, Lee, Liu (1994) and Liu (1994), Ho and Cheung (1991), as well as Ho Cheung and Cheung (1993) respectively on Taiwan stock market and SEHK.…”