Explaining Intraday Momentum With Information Asymmetry

Return momentum, a temporal persistence in returns, is a heavily studied topic in the financial markets. Gao et al. find that this momentum exists on an intraday level (2014). The first half-hour return predicts the last half-hour return to a statistically significant degree, and trading on this prediction results in a return above the market return. One proposed explanation for this predictive power is the timing of informed traders’ entry into the market at the beginning and end of the day. This study evaluates that explanation using an empirical metric to measure the amount of informed trading. This measure of informed trading is found to not have a statistical impact on the relationship between the first and last half-hour returns. Furthermore, probit regression finds that informed trading does not have a statistical impact on predicting just the sign of the last half-hour return from the sign first half-hour return. Therefore, the explanation that the intraday momentum discovered by Gao, et al. (2014) is due to the market timing of informed traders is not supported. Additional study is needed to identify the true cause of this intraday momentum.Bachelor of Art