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Price Discovery In The Pre-Opening Period. Theory And Evidence From The Madrid Stock Exchange

  • Sandro Brusco
  • Carolina Manzano
  • Mikel Tapia

    ()

Some stock exchanges, such as the Spanish Stock Exchange and Euronext (Paris), allow traders to place orders in a ‘pre-opening’ period. Orders placed in this period are used to determine the opening price, and can be cancelled at any moment and at no cost by the traders. We consider a model in which noise traders can appear in the market before or after the opening, and a strategic informed trader decides her order strategy at the pre-opening and at the opening period. We characterize the equilibrium of such a model, showing that at the pre-opening there is a non-monotonic relation between the aggregate quantity ordered and prices. Thus, the equilibrium at the pre-opening stage is determined in a way which is fundamentally different from the equilibrium in the open market. We proceed to study the implications of the existence of a pre-opening period on information revelation and on the determination of the opening price. We present evidence from the Spanish Stock Exchange that seem to support the theoretical predictions, showing a clear different in behaviour between the market behaviour before and after the opening of the market.

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Paper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb035814.

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Date of creation: Oct 2003
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Handle: RePEc:cte:wbrepe:wb035814
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  1. Vives Xavier, 1995. "The Speed of Information Revelation in a Financial Market Mechanism," Journal of Economic Theory, Elsevier, vol. 67(1), pages 178-204, October.
  2. Xavier Vives, 1994. "Short-term Investment and the Informational Efficiency of the Market," CEPR Financial Markets Paper 0034, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  3. de Jong, Frank & Nijman, Theo & Roell, Ailsa, 1996. "Price effects of trading and components of the bid-ask spread on the Paris Bourse," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 193-213, June.
  4. Medrano, Luis Angel & Vives, Xavier, 1997. "Strategic Behaviour and Price Discovery," CEPR Discussion Papers 1768, C.E.P.R. Discussion Papers.
  5. Gonzalo Rubio & Mikel Tapia, 1998. "The liquidity premium in equity pricing under a continuous auction system," The European Journal of Finance, Taylor & Francis Journals, vol. 4(1), pages 1-28.
  6. Madhavan, Ananth & Panchapagesan, Venkatesh, 2000. "Price Discovery in Auction Markets: A Look Inside the Black Box," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 627-58.
  7. Bruno Biais & Pierre Hillion & Chester Spatt, 1999. "Price Discovery and Learning during the Preopening Period in the Paris Bourse," Journal of Political Economy, University of Chicago Press, vol. 107(6), pages 1218-1248, December.
  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 1999. "The Distribution of Exchange Rate Volatility," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-059, New York University, Leonard N. Stern School of Business-.
  9. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-61, September.
  10. de Jong, F.C.J.M. & Nijman, T.E. & Röell, A.A., 1996. "Price effects of trading and components of the bid-ask spread on the Paris Bourse," Other publications TiSEM 08f5fa19-14b7-4bc8-ba07-1, Tilburg University, School of Economics and Management.
  11. Admati, Anat R & Pfleiderer, Paul, 1989. "Divide and Conquer: A Theory of Intraday and Day-of-the-Week Mean Effects," Review of Financial Studies, Society for Financial Studies, vol. 2(2), pages 189-223.
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