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Admati And Pfleiderer-A Theory Of Intraday Patterns - Volume And Price Variability

Admati And Pfleiderer-A Theory Of Intraday Patterns - Volume And Price Variability

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A Theory of Intraday Patterns: Volume and Price Variability Anat R. Admati Paul Pfleiderer Stanford University This article develops a theory in which concen- trated-trading patterns arise endogenously as a result of the strategic behavior of liquidity traders and informed traders. Our results provide a partial explanation for some of the recent empirical find- ings concerning the patterns of volume and price variability in intraday transaction data. In the last few years, intraday trading data for a number of securities have become available. Several empirical studies have used these data to identify various patterns in trading volume and in the daily behavior of security prices. This article focuses on two of these patterns; trading volume and the variability of returns. Consider, for example, the data in Table 1 concerning shares of Exxon traded during 1981. 1 The U-shaped pattern of the average volume of shares traded-namely, the heavy trading in the beginning and the end of the trading day and the relatively light trading in the middle of the day-is very typical and has been documented in a number of studies. [For example, Jain and Joh (1986) examine hourly data for the aggregate volume on the NYSE, which is reported in the Wall Street Journal, and find the same pattern.] Both the variance of price changes We would like to thank Michihiro Kandori, Allan Kleidon, David Kreps Kyle, Myron Scholes, Ken Singleton, Mark Wolfson, a referee, and especially Mike Gibbons and Chester Spatt for helpful suggestions and comments. We are also grateful to Douglas Foster and S. Viswanathan for pointing out an error in a previous draft. Kobi Boudoukh and Matt Richardson provided valuable research assistance. The financial support of the Stanford Program in Finance and Batterymarch Financial Management is gratefully acknowledged. Address reprint requests to Anat Admati, Stanford University, Graduate School of Busi- ness, Stanford, CA 94305. 1 We have looked at data for companies in the Dow Jones 30, and the patterns are similar. The transaction data were obtained from Francis Emory Fitch, Inc. We chose Exxon here since it is the most heavily traded stock in the sample. The Review of Financial Studies 1988, Volume 1, number 1, pp. 3-40. © 1988 The Review of Financial Studies 0021-9398/88/5904-013 $1.50
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T a b l e 1 The intraday trading pattern of Exxon shares in 1981 The first row gives the average volume of Exxon shares traded in 1981 in each of the three time periods. The second row gives the standard deviation (SD) of price changes, based on the transaction prices closest to the beginning and the end of the period. and the variance of returns follow a similar U-shaped pattern. [See, for example, Wood, McInish, and Ord (1985).] These empirical findings raise three questions that we attempt to answer in this article: l Why does trading tend to be concentrated in particular time periods within the trading day?
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