Program Trading and Intraday Volatility
Posted: 14 May 2000
Program trading and intraday changes in the S&P 500 Index are correlated. Future prices and, to a lesser extent, cash prices lead program trades. Index arbitrage trades are followed by an immediate change in the cash index, which ultimately reverses slightly. No reversal follows non- arbitrage trades. The cumulative index changes associated with buy and sell trades and with arbitrage and non- arbitrage trades all are similar. Price decomposition suggest that the results are not due to microstructure effects. Program trades in this 1989-1990 sample do not appear to have created short-term liquidity problems. The results are stable within the sample.
JEL Classification: G13
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