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Program Trading and Intraday Volatility

Author

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  • Harris, Lawrence
  • Sofianos, George
  • Shapiro, James E

Abstract

Program trading and intraday changes in the S&P 500 Index are correlated. Future prices and, to a lesser extent, cash prices lead program trades. Index extent, cash prices lead program trades. Index arbitrage trades are followed by an immediate change in the cash index, which ultimately reverses slightly. No reversal follows nonarbitrage trades. The cumulative index changes associated with buy-and-sell trades and with arbitrage and nonarbitrage trades all are similar. Price decompositions suggest that the results are not due to microstructure effects. Program trades in this 1989-90 sample do not seem to have created major short-term liquidity problems. The results are stable within the sample. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Harris, Lawrence & Sofianos, George & Shapiro, James E, 1994. "Program Trading and Intraday Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 653-685.
    • Handle: RePEc:oup:rfinst:v:7:y:1994:i:4:p:653-85
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    Citations

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    Cited by:

    1. de Jong, Frank & Nijman, Theo, 1997. "High frequency analysis of lead-lag relationships between financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 259-277, June.
    2. Hasbrouck, Joel, 1996. "Order characteristics and stock price evolution An application to program trading," Journal of Financial Economics, Elsevier, vol. 41(1), pages 129-149, May.
    3. Joel Hasbrouck & Duane J. Seppi, 1998. "Common Factors in Prices, Order Flows and Liquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-011, New York University, Leonard N. Stern School of Business-.
    4. Corwin, Shane A. & Lipson, Marc L., 2011. "Order characteristics and the sources of commonality in prices and liquidity," Journal of Financial Markets, Elsevier, vol. 14(1), pages 47-81, February.
    5. Joel Hasbrouck, 1999. "Trading Fast and Slow: Security Market Events in Real Time," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-012, New York University, Leonard N. Stern School of Business-.
    6. Fung, Joseph K. W. & Mok, Henry M. K., 2003. "Early unwinding of options-futures arbitrage with bid/ask quotations and transaction prices," Global Finance Journal, Elsevier, vol. 14(2), pages 121-133, July.
    7. Joseph K.W. Fung, 2006. "Order Imbalance and the Pricing of Index Futures," Working Papers 132006, Hong Kong Institute for Monetary Research.
    8. Warren Bailey & Lin Zheng & Yinggang Zhou, 2012. "What Makes the VIX Tick?," Working Papers 222012, Hong Kong Institute for Monetary Research.
    9. Lucy F. Ackert & Yisong S. Tian, 2000. "Evidence on the efficiency of index options markets," Economic Review, Federal Reserve Bank of Atlanta, vol. 85(Q1), pages 40-51.
    10. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March.
    11. Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1607-1634, September.
    12. Li, Mingyi & Yin, Xiangkang & Zhao, Jing, 2020. "Does program trading contribute to excess comovement of stock returns?," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 257-277.
    13. Joseph K.W. Fung & Philip Yu, 2007. "Order Imbalance and the Dynamics of Index and Futures Prices," Working Papers 072007, Hong Kong Institute for Monetary Research.
    14. Md. Mohibul Islam & Anisul M. Islam, 2017. "Impact of Index Options on Emerging Market Volatility: The Case of the Malaysian Equity Market," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(9), pages 157-15-172, 09-2017.
    15. Chang, Charles & Lin, Emily, 2015. "Cash-futures basis and the impact of market maturity, informed trading, and expiration effects," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 197-213.
    16. Pascal Alphonse, 2007. "Mispricing Persistence and the Effectiveness of Arbitrage Trading," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 123-156, March-Jun.
    17. Eric Jondeau & Xuewu Wang & Zhipeng Yan & Qunzi Zhang, 2020. "Skewness and index futures return," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1648-1664, November.
    18. Anna Calamia, 1999. "Market Microstructure: Theory and Empirics," LEM Papers Series 1999/19, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    19. M. -W. Hung & C. -F. Lee & L. -C. So, 2003. "Impact of foreign-listed single stock futures on the domestic underlying stock markets," Applied Economics Letters, Taylor & Francis Journals, vol. 10(9), pages 567-574.

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