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

Author

Listed:
  • 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.

Suggested Citation

  • Gernot Hinterleitner & Philipp Hornung & Ulrike Leopold-Wildburger & Roland Mestel & Stefan Palan, 2012. "A Good Beginning Makes a Good Market: The Effect of Different Market Opening Structures on Market Quality," Working Paper Series, Social and Economic Sciences 2012-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
  • Handle: RePEc:grz:wpsses:2012-01
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    File Function: First version, 2012
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    References listed on IDEAS

    as
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    3. 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, vol. 43(01), pages 93-121, March.
    4. Madhavan, Ananth, 1996. "Security Prices and Market Transparency," Journal of Financial Intermediation, Elsevier, vol. 5(3), pages 255-283, July.
    5. Kehr, Carl-Heinrich & Krahnen, Jan P. & Theissen, Erik, 2001. "The Anatomy of a Call Market," Journal of Financial Intermediation, Elsevier, vol. 10(3-4), pages 249-270, July.
    6. Pagano, Marco & Roell, Ailsa, 1992. "Auction and dealership markets : What is the difference?," European Economic Review, Elsevier, vol. 36(2-3), pages 613-623, April.
    7. 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, vol. 40(04), pages 779-801, December.
    8. Theissen, Erik, 2000. "Market structure, informational efficiency and liquidity: An experimental comparison of auction and dealer markets," Journal of Financial Markets, Elsevier, vol. 3(4), pages 333-363, November.
    9. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    10. 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, vol. 7(5), pages 495-521, December.
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    Cited by:

    1. Morone, Andrea & Nuzzo, Simone, 2016. "Do Markets (Institutions) Drive Out Lemmings or Vice Versa?," MPRA Paper 74322, University Library of Munich, Germany.
    2. Morone, Andrea & Nuzzo, Simone, 2015. "Market Efficiency, Trading Institutions and Information Mirages: evidence from an experimental asset market," MPRA Paper 67448, University Library of Munich, Germany.

    More about this item

    Keywords

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

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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