Analysis Report on 10-minute VWAP Change

1. Introduction
VWAP(volume weighed average price) indicates the stock market price. Any change of VWAP reflects the future trend of stock. In this report we use 32 stock indexes to explain the change of VWAP. From the model, 1-minute change,1-minute momentum, 1-minute change of TBT and other 15 indexes affect VWAP significant. Based on the result investors can take use of historical stock data to predict the change of VWAP and find a perfect trading timing.

2. Data Source and Variable Description

We use 1-minute trading data of 962 stocks in Russell 1000 from Jan, 18, 2011 to Apr, 18, 2011 and select predictors as follows, pt: ratio of trade which were print_at_bid in 1-minute interval . pt2: ratio of trade which were print_at_bid in 2-minute interval. pt5: ratio of trade which were print_at_bid in 5-minute interval. openchg: change of price compared with daily open price. closechg: change of price compared with last-day close price. chg, chg5, chg15: 1-minute, 5- minute, 15-minute change. chgMDY, chgMDY5, chgMDY15: 1-minute, 5-minute, 15-minute change of MDY. open_chgTBT: change of TBT compared with daily open TBT. close_chgTBT: change of TBT compared with last-day close TBT. chgTBT, chgTBT5, chgTBT15: 1-minute, 5-minute, 15-minute change of TBT. open_chgTBT: change of TBT compared with daily open TBT. close_chgTBT: change of TBT compared with last-day close TBT. IWM2VTI: difference to IWM change and VTI change in 1 minute. IWM2VTI5: difference to IWM change and VTI change in 5 minute. IWM2VTI15: difference to IWM change and VTI change in 15 minute. open_IWM2VTI: change of IWM2VTI compared with daily open IWM2TBT. close_IWM2VTI: change of IWM2VTI compared with last-day IWM2TBT. mom1: acceleration between1-minute and 2-minute vwap mom2: acceleration between2-minute and 5-minute vwap mom5: acceleration between5-minute and 15-minute vwap open_chgSector, close_chgSector, chgSector, chgSector5, chgSector15 are defined similarly, indicating the change of the sector. vwap_mavg: vwap moving average in 30 minutes. For calculation convenience, all units are bps.We want to predict vwapChg10a- the change of vwap in next 10 minutes.

3. Prescreen Data
We add several filters in order to validate and screen data.

1. Due to instability of our data source, all stocks without assigned sectors are abandoned and all NA values are filled with either 0 or the same value as previous minute to accommodate the following analysis. 2. Data with less than 10 trades per minute are deleted. Because small number of trades will increase price instability and large amount of such data will falsely improve the model performance (overfitting), reducing prediction power. Furthermore, we would abandon the whole stock if more than 90% of its data has less than 10 trades per minute. 3. Only data between 10:00AM and 15:30PM are selected. This is the most stable price period during trading day. 4. We exclude all data that reflects possible sudden market movements. For example, it is very unlikely for closechg to plummet 10% in a stable market. And even such circumstance does exist, it is difficult to predict anyway. Therefore, only 1,000 bps fluctuation of closechg and 300 bps of chg15/vwapchg10a are allowed. Data not satisfying above criteria will be otherwise eliminated. After all above filtering we finally selected 850 stocks from Rusell 1000 to fit regression model.

4. Models and Variable Estimations

We use Stepwise Regression to explore the relationship between response variable -vwapChg10a and predictors. Backward Elimination option is chosen, which involves starting with all candidate variables and testing them one by one for statistical significance, deleting any that are not significant. We run a stepwise regression for each stock and acquired occurrences of all 34 predict variables.

Table.1 Regression Model Results

Variable Percent pt 58.12% pt2 42.82% pt5 49.29% openchg 69.06% closechg 68.82% chg 93.65% chg5 55.76% chg15 65.41% R-square 0.0259 Variable chgMDY chgMDY5 chgMDY15 open_chgMDY close_chgMDY chgTBT chgTBT5 chgTBT15 Percent Variable 44.00% open_chgTBT 53.29% close_chgTBT 65.76% IWM2VTI 68.71% IWM2VTI5 69.53% IWM2VTI15 11.88% open_IWM2VTI 62.82% close_IWM2VTI 53.53% mom1 F-test P-value <0.0001 Percent 70.59% 64.82% 45.18% 48.82% 64.35% 58.59% 63.53% 73.53% Variable mom2 mom5 open_chgSector close_chgSector chgSector chgSector5 chgSector15 vwap_mavg Percent 55.06% 62.94% 61.29% 67.18% 31.41% 54.24% 64.94% 63.29%

From the table, we see that the F test p-value is very small, and R-square is about 3%, which means these variables can predict vwapchg10a to some extent. Then which variables have more effect on the variation of vwapchg10a? Let us see the plot below.

Counts of Significant Variables

100.00% 90.00% 80.00% 70.00%
60.00%

50.00% 40.00% Percentage 30.00% 20.00%

10.00%

0.00%

close_IWM2VTI

close_chgMDY

close_chgTBT

open_IWM2VTI

open_chgMDY

open_chgSector

close_chgSector

open_chgTBT

chgSector15

closechg

chg5

openchg

chgMDY

chgSector

chgTBT

chg

pt

pt2

pt5

chgSector5

chgMDY15

chgTBT15

chg15

IWM2VTI5

chgMDY5

IWM2VTI

chgTBT5

mom5

mom1

mom2

Altogether, there are 18 variables which are significant in more than 60% models, openchg, closechg, chg, chg15, chgMDY15, open_chgMDY, close_chgMDY, chgTBT, open_chgTBT, close_chgTBT, IWM2VTI, closeIWM2VTI, mom1, mom5, open_chgSecotr, close_chgSector, chgSector15, vwap_mavg. Especially chg, mom1 and open_chgTBT are significant in more than 70% models.

Table.2 Variable Estimations

Variable openchg closechg chg chg15 chgMDY15 open_chgMDY Estimate (0.0168) 0.0003 (0.0868) 0.0602 (0.3787) (0.1126) p-value 0.0186 0.0178 0.0051 0.0179 0.0147 0.0142 Variable close_chgMDY chgTBT open_chgTBT close_chgTBT IWM2VTI close_IWM2VTI Estimate 0.1819 (0.0262) 0.0055 0.0055 0.0945 (0.1277) p-value 0.0137 0.0691 0.0175 0.0216 0.0462 0.0171 Variable mom1 mom5 open_chgSector close_chgSector chgSector15 vwap_mavg Estimate 0.1246 0.0207 0.0034 (0.0261) 0.3249 0.0154 p-value 0.0227 0.0191 0.0186 0.0145 0.0199 0.0224

From the table above, vwapchg10a is positively correlated with closechg, chg15, cholse_chgMDY, open_chgTBT, close_chgTBT, chgSector15 and vwap_mavg. While vwapchg10a is negatively correlated with openchg, chg, chgMDY15, open_chgMDY, chgTBT, close_chgSector.

5. Summary and Conclusion

From above analysis, we could see that almost all close related predictors positively affect our response variables. This is intuitively reasonable since the higher todays price is against previous close price, more

vwap_mavg

IWM2VTI15

likely it is staying on the uptrend and vice versa. On the other hand, almost all open related predictors are negatively correlated. If we treat open price as baseline, price going way above it will be easily dragged down by market, which reflects our discovery. The only exception is open_chgTBT, which behaves the opposite way. Also, the sector effect lags change of vwap, since chgSector and chgSector5 is not in the model. This is because the effect of sector lags the change of vwap.

6. Future Work
We will expand the method to Russell 2000 and expect to see difference result with small cap companies. Furthermore, we will separate the stock by volume and volatility in order to find a better predicting method .