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Trading Behavior on Expiration Days and Quarter-End Days: The Effect of a New Closing Method

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  • Yu Chuan Huang
  • Shu Hui Chan
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    Abstract

    On July 1, 2002, the Taiwan Stock Exchange changed its closing price procedure to a five-minute call auction. This paper examines different types of trader behavior at the close before and after institution of the new mechanism. The results show that, since the new mechanism was introduced, individuals have shifted their trades away from the closing interval to the preclosing interval, which worsens market liquidity at the close. This paper also finds that institutional investors try to influence closing prices for window dressing at quarter ends, whereas foreign institutions attempt to influence closing prices on the expiration days of index futures. After the new mechanism's introduction, neither the expiration-day effect nor the quarter-end-day effect disappeared. Despite this finding, the new mechanism does make it more difficult and costly for traders to attempt to influence the stock price.

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    Bibliographic Info

    Article provided by M.E. Sharpe, Inc. in its journal Emerging Markets Finance and Trade.

    Volume (Year): 46 (2010)
    Issue (Month): 4 (January)
    Pages: 105-125

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    Handle: RePEc:mes:emfitr:v:46:y:2010:i:4:p:105-125

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    Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=111024

    Related research

    Keywords: manipulation; market mechanism; trader behavior;

    References

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    1. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    2. Rosita P. Chang & Shuh-Tzy Hsu & Nai-Kuan Huang & S. Ghon Rhee, 1999. "The Effects of Trading Methods on Volatility and Liquidity: Evidence from the Taiwan Stock Exchange," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(1-2), pages 137-170.
    3. Cushing, David & Madhavan, Ananth, 2000. "Stock returns and trading at the close," Journal of Financial Markets, Elsevier, vol. 3(1), pages 45-67, February.
    4. David Michayluk & Gary C. Sanger, 2006. "Day-End Effect On The Paris Bourse," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 29(1), pages 131-146.
    5. Jin-Shuei Luo & Chun-An Li, 2008. "Futures Market Sentiment and Institutional Investor Behavior in the Spot Market: The Emerging Market in Taiwan," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 44(2), pages 70-86, March.
    6. Madhavan, Ananth, 1992. " Trading Mechanisms in Securities Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 607-41, June.
    7. Anchor Y. Lin & Lin-Shang Huang & Mei-Yuan Chen, 2007. "Price Comovement and Institutional Performance Following Large Market Movements," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(5), pages 37-61, October.
    8. Yu Chuan Huang & Pei Lin Tsai, 2008. "Effectiveness of Closing Call Auctions: Evidence from the Taiwan Stock Exchange," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 44(3), pages 5-20, May.
    9. Hillion, Pierre & Suominen, Matti, 2004. "The manipulation of closing prices," Journal of Financial Markets, Elsevier, vol. 7(4), pages 351-375, October.
    10. Mark M. Carhart & Ron Kaniel & David K. Musto & Adam V. Reed, 2002. "Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds," Journal of Finance, American Finance Association, vol. 57(2), pages 661-693, 04.
    11. Amihud, Yakov & Mendelson, Haim & Murgia, Maurizio, 1990. "Stock market microstructure and return volatility : Evidence from Italy," Journal of Banking & Finance, Elsevier, vol. 14(2-3), pages 423-440, August.
    12. Mei-Hsing Cheng & Hsin-Hong Kang, 2007. "Price-Formation Process of an Emerging Futures Market: Call Auction Versus Continuous Auction," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 43(1), pages 74-97, February.
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