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Do volatility extensions improve the quality of closing call auctions?

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  • Ester Félez‐Viñas
  • Björn Hagströmer

Abstract

To improve the efficiency of the closing price, many equity exchanges apply volatility extensions to their closing call auctions (CCAs). If an imminent auction execution implies a large price change, the order submission period is extended to let traders reconsider their orders. This paper uses the introduction of closing auction volatility extensions at NASDAQ Nordic to provide the first analysis of the effects of such mechanisms. We find that the volatility extensions reduce transitory volatility and deter price manipulation at the close. Consistent with increased trust in the mechanism, the CCA attracts higher volumes after the change.

Suggested Citation

  • Ester Félez‐Viñas & Björn Hagströmer, 2021. "Do volatility extensions improve the quality of closing call auctions?," The Financial Review, Eastern Finance Association, vol. 56(3), pages 385-406, August.
    • Handle: RePEc:bla:finrev:v:56:y:2021:i:3:p:385-406
    DOI: 10.1111/fire.12275
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