Intraday Market-Wide Ups/Downs and Returns

Abstract

Using stock market data over 16 years for Chinese stock markets and over 3 years for U.S. stock markets, this study explores the explanatory power of early intraday market-wide up and down movements to the subsequent intraday returns within the same trading day. As compared to the closing of the previous trading day, we introduce two intraday market-wide up/down indicators in terms of the index return and the proportional difference in the numbers of stocks moving upwards to downwards at each minute. A time series analysis shows an economically and statistically significant positive relation between the intraday indicators and the subsequent intraday returns of the market indices. Intraday trading strategies that exploit this intraday relationship lead to monthly returns of 4.1% in the Chinese market and 2.8% in the U.S. market. In addition, the strategies are more profitable in markets with high activity of individual investors (i.e., high trading value, low trading volume per transaction, small-cap, high B/M ratio, low institutional ownership, low price, and high number of shareholders). The results indicate that simple intraday market-wide up/down movements in the earlier trading affect the sentiment of retail investors, resulting in market movements in the same direction within the trading day.

Keywords: Intraday market-wide movements, Intraday returns, Investor sentiment, Individual (retail) investors