SEC Follow Up Exhibits Part C SEC_OEA_FCIC_001760-2501

Abnormal End-of-Day Volatility
In order to establish a more meaningful comparison of intraday patterns across high-and
low-volatility periods, we developed a metric called “normalized variance” that isolates
the contribution of each half-hour period to total volatility, while controlling for total
volatility. See Appendix 1 for how this metric is calculated. To interpret values of this
variance metric on the following graphs, a value of 1.5 observed for the last half hour of
the day indicates that return variance is 50% higher than the intraday average on the same
day. If volatility is U-shaped over the day, this variance metric will be higher than one
near the beginning and end of the day, and lower than one in the middle of the day.
Figure 6 graphs the intraday pattern in this variance metric for Q2, Q3, and Q4 of 2008,
alongside the long-term benchmark pattern estimated over the period 1986-2008. The
graph shows that end-of-day volatility was no higher than usual in Q2 of 2008, but
became higher during the crisis. In particular, variance was particularly high the fourth
quarter of 2008, when volatility in the last half hour of the day was nearly 2 ½ times the
intraday average. 4
Normalized Variance
3
2.5
2
1.5
1
0.5
Figure 6
Normalized Intraday Variance, S&P 500 Futures
Q2, Q3, Q4 2008 vs. Long-Term Benchmark
0
9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00
Time
2008 Q2
2008 Q3
2008 Q4
1986-2008
4 Although it is not shown on the graph, it is worth noting that end-of-day variance was also high during the
third and fourth quarters of 2007, when variance in the last half hour of the day was roughly double the
intraday average.
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SEC_OEA_FCIC_001810