On Intraday Risk Premia




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    • Spiegel is from the Haas School of Business, University of California, Berkeley. Subrahmanyam is from the Graduate School of Business, Columbia University and the Anderson Graduate School of Management, University of California, Los Angeles. An earlier version of this article was entitled “Intraday Risk Premia in a Continuous Time Market.” We thank two anonymous referees, the editor (René Stulz), Michael Brennan, Jerome Detemple, Darrell Duffie, Will Goetzmann, Pete Kyle, Erzo Luttmer, Ananth Madhavan, Chester Spatt, Hans Stoll, Suresh Sundaresan, Robert Verrecchia, Jean-Luc Vila, and participants at the Wharton School and Vanderbilt University finance seminar series, the 1992 New York Stock Exchange/University of California, Los Angeles/University of Southern California conference on market microstructure, the 1992 conference of the French Finance Association, the 1993 Winter Meetings of the Econometric Society, and the 1993 Western Finance Association Meetings for valuable comments and suggestions. In addition, we are indebted to Larry Glosten and Mark Lowenstein for pointing out an error in an earlier version and for several other insights. All errrors are our sole responsibility.


This article presents a framework for analyzing the dynamic effects of anticipated large demand pressures on asset risk premia. We show that large institutions who can time their entry into the market will trade either at the open, or during periods of unusual demand pressures. We show that if these institutions do enter later in the day, they trade in the same direction as institutions which provide liquidity continuously; institutions therefore appear to exhibit “herding” behavior. We also explore how changing the uncertainty of demand pressures late in the day affects trading costs throughout the day.