International Investing Beyond Diversification

Heston et al. (2010) find puzzling intra-day patterns in stock returns, which are particularly strong at the beginning and end of the trading day. We demonstrate the patterns persist out-of-sample and test several explanatory variables, including trading frictions and proxies for trader type. They jointly explain all the open and mid-day periodicity, and up to 30% of the closing interval periodicity. Our proxies for institutional trading — changes in lendable shares, VWAP-like trading, and index inclusion — are the most significant explanatory variables. Overall, the results suggest that open periodicity is driven by VWAP trading while close periodicity by market-on-close trading.