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Intraday variation in cross-sectional stock comovement and impact of index-based strategies

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  • Shen, Yiwen
  • Shi, Meiqi

Abstract

We investigate how comovement of S&P 500 stocks changes during a day using a large high-frequency dataset and estimators that are robust under microstructure noise and asynchronicity. We find that, in 2011 to 2021, the stock correlation increases substantially throughout the trading session, while the cross-sectional beta dispersion decreases concurrently. Thus, S&P 500 stocks exhibit stronger comovement near the market close. The time-varying comovement can be explained by the intraday variation in the composition of index-based and firm-based order flows. A cross-section market impact model with time-varying demand from single-stock and index investors generates the intraday patterns we observe.

Suggested Citation

  • Shen, Yiwen & Shi, Meiqi, 2024. "Intraday variation in cross-sectional stock comovement and impact of index-based strategies," Journal of Financial Markets, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:finmar:v:68:y:2024:i:c:s1386418124000120
    DOI: 10.1016/j.finmar.2024.100894
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    Keywords

    Intraday stock comovement; Index-based investing; High-frequency estimation; Big data; Cross-impact;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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