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Opening and Closing Asymmetry: Empirical Analysis from ISE Xetra

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Author Info
Robert Kelly (Dept. of Economics, National University of Ireland, Maynooth, Co. Kildare)
Abstract

Overnight news yields difficulties for price discovery at market opening culminating in additional return volatility. Biais et al. (2007) show opening prices are sensitive to order flow from the pre-trading session. We investigate the existence of volatility asymmetry between opening and closing returns and trader over-reaction on the Irish Stock Exchange (ISE). Opening on the ISE follows a non-transparent pre-trading session. We estimate opening returns are 10 per cent more volatile than closing returns. This is significantly smaller compared to other exchanges, such as LSE. The LSE operates under a transparent pre-trading session, which is susceptible to order flow manipulation. We implement an ARMA(1,1) framework to investigate the speed of trader reaction to news. Over-reaction is recorded at the morning auction but is smaller in magnitude when compared to international markets with transparent pre-trading and ‘non-binding’ orders. The level of price reversal bolsters the over-reaction argument. We estimate a 30 per cent reversal of overnight returns with one third taking place in the first thirty minutes of trading.

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File URL: http://www.esr.ie/Vol39_1/04%20Kelly.pdf
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File Function: First version, 2008
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Publisher Info
Article provided by Economic and Social Studies in its journal Economic and Social Review.

Volume (Year): 39 (2008)
Issue (Month): 1 ()
Pages: 55-78
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:eso:journl:v:39:y:2008:i:1:p:55-78

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  1. Knif, Johan & Pynnonen, Seppo, 1999. "Local and global price memory of international stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 129-147, April. [Downloadable!] (restricted)
  2. Ozenbas, Deniz & Schwartz, Robert A & Wood, Robert A, 2002. "Volatility in US and European Equity Markets: An Assessment of Market Quality," International Finance, Blackwell Publishing, vol. 5(3), pages 437-61, Winter. [Downloadable!] (restricted)
  3. Sandro Brusco & Carolina Manzano & Mikel Tapia, 2003. "Price Discovery In The Pre-Opening Period. Theory And Evidence From The Madrid Stock Exchange," Business Economics Working Papers wb035814, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  4. Biais, Bruno & Bisière, Christophe & Pouget, Sébastien, 2009. "Equilibrium Discovery and Preopening Mechanisms in an Experimental Market," IDEI Working Papers 543, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  5. Madhavan, Ananth & Panchapagesan, Venkatesh, 2000. "Price Discovery in Auction Markets: A Look Inside the Black Box," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(3), pages 627-58.
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  14. Theobald, Michael & Yallup, Peter, 2004. "Determining security speed of adjustment coefficients," Journal of Financial Markets, Elsevier, vol. 7(1), pages 75-96, January. [Downloadable!] (restricted)
  15. Theobald, Michael & Yallup, Peter, 1998. "Measuring cash-futures temporal effects in the UK using partial adjustment factors," Journal of Banking & Finance, Elsevier, vol. 22(2), pages 221-243, February. [Downloadable!] (restricted)
  16. Jegadeesh, Narasimhan & Titman, Sheridan, 1995. "Overreaction, Delayed Reaction, and Contrarian Profits," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(4), pages 973-93. [Downloadable!] (restricted)
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  17. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-41, June. [Downloadable!] (restricted)
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  18. Amihud, Yakov & Mendelson, Haim, 1989. "Market microstructure and price discovery on the Tokyo Stock Exchange," Japan and the World Economy, Elsevier, vol. 1(4), pages 341-370, November. [Downloadable!] (restricted)
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