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A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality

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Author Info

  • Gernot Hinterleitner

    (Institute of Statistics and Opterations Research, Karl-Franzens-University Graz)

  • Philipp Hornung

    (Institute of Statistics and Opterations Research, Karl-Franzens-University Graz)

  • Ulrike Leopold-Wildburger

    ()
    (Institute of Statistics and Opterations Research, Karl-Franzens-University Graz)

  • Roland Mestel

    ()
    (Institute of Banking and Finance, Karl-Franzens-University Graz)

  • Stefan Palan

    ()
    (Institute of Banking and Finance, Karl-Franzens-University Graz)

Abstract

This paper deals with the market structure at the opening of the trading day and its influence on subsequent trading. We compare a single continuous double auction and two complement markets with different call auction designs as opening mechanisms in a unified experimental framework. The call auctions differ with respect to their levels of transparency. We find that a call auction not only improves market quality at the beginning of the trading day when com-pared to the stand-alone continuous double auction, but also causes positive spillover effects on subsequent trading. Concerning the design of the opening call auction, we find no signifi-cant differences between the transparent and nontransparent specification with respect to opening prices and liquidity. In the course of subsequent continuous trading, however, market quality is slightly higher after a nontransparent call auction.

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Bibliographic Info

Paper provided by Faculty of Social and Economic Sciences, Karl-Franzens-University Graz in its series Working Paper Series, Social and Economic Sciences with number 2012-01.

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Length: 27 pages
Date of creation: 25 May 2012
Date of revision:
Handle: RePEc:grz:wpsses:2012-01

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Keywords: Call auction; continuous double auction; transparency; market quality;

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References

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  1. Madhavan, A., 1991. "Security Prices and Market Transparency," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 1-92, Wharton School - Weiss Center for International Financial Research.
  2. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, American Finance Association, vol. 51(2), pages 579-611, June.
  3. Davies, Ryan J., 2003. "The Toronto Stock Exchange preopening session," Journal of Financial Markets, Elsevier, Elsevier, vol. 6(4), pages 491-516, August.
  4. Pagano, Marco & Roell, Ailsa, 1992. "Auction and dealership markets : What is the difference?," European Economic Review, Elsevier, Elsevier, vol. 36(2-3), pages 613-623, April.
  5. Ellul, Andrew & Shin, Hyun Song & Tonks, Ian, 2005. "Opening and Closing the Market: Evidence from the London Stock Exchange," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 40(04), pages 779-801, December.
  6. Theissen, Erik, 2000. "Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 3(4), pages 333-363, November.
  7. Ananth N. Madhavan, . "Trading Mechanisms in Securities Markets," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 16-90, Wharton School Rodney L. White Center for Financial Research.
  8. Comerton-Forde, Carole & Ting Lau, Sie & McInish, Thomas, 2007. "Opening and closing behavior following the introduction of call auctions in Singapore," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 15(1), pages 18-35, January.
  9. Comerton-Forde, Carole, 1999. "Do trading rules impact on market efficiency? A comparison of opening procedures on the Australian and Jakarta Stock Exchanges," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 7(5), pages 495-521, December.
  10. Chang, Rosita P. & Rhee, S. Ghon & Stone, Gregory R. & Tang, Ning, 2008. "How does the call market method affect price efficiency? Evidence from the Singapore Stock Market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 32(10), pages 2205-2219, October.
  11. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, Elsevier, vol. 17(2), pages 223-249, December.
  12. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
  13. Kehr, Carl-Heinrich & Krahnen, Jan P. & Theissen, Erik, 2001. "The Anatomy of a Call Market," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 10(3-4), pages 249-270, July.
  14. Andy Snell & Ian Tonks, 2003. "A theoretical analysis of institutional investors' trading costs in auction and dealer markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(489), pages 576-597, 07.
  15. Barclay, Michael J. & Hendershott, Terrence & Jones, Charles M., 2008. "Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 43(01), pages 93-121, March.
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