SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

General Pattern in Intraday Volatility
It has long been known that stock market volatility follows a U-shaped pattern over the
trading day, with volatility higher near the beginning and end of trading hours than in the
middle of the day. 3 This pattern has been observed over a long period of time in various
markets, and is not unique to periods of market crisis. Some commentators have
suggested that end-of-day volatility during the 2008 crisis has been abnormally high, and
have expressed concerns that this may be related to trading by certain groups or linked to
certain instruments such as leveraged Exchange-Traded Funds. In order to assess the
extent to which end-of-day volatility was abnormally high during the 2008 crisis, we
compared the intraday volatility pattern during the crisis to the typical pattern observed in
other periods.
To establish the typical pattern of market volatility over the day, we used data provided
by TickData to examine price movements of the S&P 500 index and S&P 500 Futures
over 30-minute intervals. We verified that over the course of the day volatility tends to
follow a U-shaped pattern: volatility begins high, decreases over the first two hours of the
trading day, remains low between 11:30 and 2:00, and increases over the last two hours.
The same basic pattern was observed for both S&P 500 Futures prices and S&P 500
Index values.
Figure 4 graphs the volatility on the cash index and on the futures price for each half-hour
period over the period 1986-2008. As the figure indicates, volatility at both the beginning
and end of the day is approximately 10 basis points higher than during the middle of the
day.
Note that for the first half-hour period of the day, the index return was significantly more
volatile than the futures return. This is due to the fact that the index value at 9:30 is
computed before the opening prices of the component stocks has been established, and so
it is computed with stale prices that do not reflect the overnight return. This is not an
issue for the futures price so the subsequent analysis only used S&P 500 Futures prices.
3 For example, see Lockwood, Larry J. and Scott C. Linn, 1990, “An Examination of stock market return
volatility during overnight and intraday periods, 1964-1989.” Journal of Finance v45 pp. 591-601.
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SEC_OEA_FCIC_001807