Price Discovery in Auction Markets: A Look Inside the Black Box
Opening mechanisms play a crucial role in information aggregation following the overnight nontrading period. This article examines the process of price discovery at the New York Stock Exchange single-price opening auction. We develop a theoretical model to explain the determinants of the opening price and test the model using order-level data. We show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market. This is consistent with specialists extracting information from observing the evolution of the limit order book. In addition, the specialist's opening trade reflects noninformational factors such as price stabilization requirements. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Volume (Year): 13 (2000)
Issue (Month): 3 ()
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- repec:att:wimass:9427 is not listed on IDEAS
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- Brooks, Raymond M. & Su, Tie, 1997. "A Simple Cost Reduction Strategy for Small Liquidity Traders: Trade at the Opening," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 525-540, December.
- Schnitzlein, Charles R, 1996. " Call and Continuous Trading Mechanisms under Asymmetric Information: An Experimental Investigation," Journal of Finance, American Finance Association, vol. 51(2), pages 613-36, June.
- Dutta, Prajit K. & Madhavan, Ananth, 1995.
"Price Continuity Rules and Insider Trading,"
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- Domowitz, Ian & Wang, Jianxin, 1994. "Auctions as algorithms : Computerized trade execution and price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 29-60, January.
- Ronen, Tavy, 1997. "Tests and Properties of Variance Ratios in Microstructure Studies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 183-204, June.
- Amihud, Yakov & Mendelson, Haim, 1987. " Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-53, July.
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