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Noise In the Price Discovery Process: A Comparison of Periodicand Continuous Auctions


  • Coppejans, Mark
  • Domowitz, Ian


We examine market volatility across an automated periodic auction mechanism and a continuous automated auction, using data on five futures contracts traded on the GLOBEX trading system. The analysis is supplemented by a comparison of the periodic market with floor trading. Our data permit virtually no lag between the close of continuous trading and the periodic auction just preceding further continuous trading, avoiding ambiguities in results due to periods of non-trading. Theoretical results are summarized, which suggest greater volatility in the continuous market, but which also imply equality of price volatility across periodic and continuous mechanisms for some market conditions. The empirical analysis consists both of direct comparisons via variance ratios and variance ratio tests conditional on a model of price and value adjustment previously suggested by Amihud and Mendelson (1987). We show how to directly estimate the structural parameters of the model, and derive a test of market efficiency conditional on the model's structure. Our results indicate that the periodic auction yields the same volatility as the automated continuous market for a stock index contract, but that the periodic market is associated with relatively lower volatility for currency futures. Tests fail to reject market efficiency for the index contract and three out of four currency futures.

Suggested Citation

  • Coppejans, Mark & Domowitz, Ian, 1997. "Noise In the Price Discovery Process: A Comparison of Periodicand Continuous Auctions," Working Papers 97-04, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:97-04

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    References listed on IDEAS

    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Amihud, Yakov & Mendelson, Haim & Murgia, Maurizio, 1990. "Stock market microstructure and return volatility : Evidence from Italy," Journal of Banking & Finance, Elsevier, vol. 14(2-3), pages 423-440, August.
    3. Domowitz, Ian, 1993. "A taxonomy of automated trade execution systems," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 607-631, December.
    4. Kearns, P & Pagan, A R, 1993. "Australian Stock Market Volatility: 1875-1987," The Economic Record, The Economic Society of Australia, vol. 69(205), pages 163-178, June.
    5. Cohen, Kalman J, et al, 1978. "The Returns Generation Process, Returns Variance, and the Effect of Thinness in Securities Markets," Journal of Finance, American Finance Association, vol. 33(1), pages 149-167, March.
    6. Amihud, Yakov & Mendelson, Haim, 1991. " Volatility, Efficiency, and Trading: Evidence from the Japanese Stock Market," Journal of Finance, American Finance Association, vol. 46(5), pages 1765-1789, December.
    7. Ho, Thomas S Y & Schwartz, Robert A & Whitcomb, David K, 1985. " The Trading Decision and Market Clearing under Transaction Price Uncertainty," Journal of Finance, American Finance Association, vol. 40(1), pages 21-42, March.
    8. Harris, L., 1990. "Liquidity , Trading Rules and Electronic Trading Systems ," Papers 91-8, Southern California - School of Business Administration.
    9. Mendelson, Haim, 1982. "Market Behavior in a Clearing House," Econometrica, Econometric Society, vol. 50(6), pages 1505-1524, November.
    10. Amihud, Yakov & Mendelson, Haim, 1987. " Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-553, July.
    11. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
    12. 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.
    13. Smith, Tom, 1994. "Econometrics of Financial Models and Market Microstructure Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(04), pages 519-540, December.
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