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Market Microstructure and Securities Values: Evidence from the Tel Aviv Stock Exchange

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  • Yakov Amihud
  • Haim Mendelson
  • Beni Lauterbach
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    Abstract

    This paper examines the value effects of improvements in the trading mechanism. Stocks on the Tel Aviv Stock Exchange were transferred gradually from a daily call auction to a mechanism where the call auction was followed by iterated continuous trading sessions. This event was associated with a positive and permanent price appreciation. The cumulative average market-adjusted return over a period that started five days prior to the announcement and ended 30 days after the stocks started trading by the new method was approximately 5.5%. In addition, we find positive liquidity externalities (spillovers) across related stocks, and improvements in the value discovery process due to the improved trading method. Finally, there was a positive association between liquidity gains and price appreciation. Our results suggest that improvements in market microstructure are valuable.

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    Bibliographic Info

    Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 98-004.

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    Date of creation: Oct 1997
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    Handle: RePEc:fth:nystfi:98-004

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    Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
    Phone: (212) 998-0100
    Web page: http://w4.stern.nyu.edu/finance/
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