Opening and closing asymmetry: empirical analysis from ISE Xetra
Item Type:Conference Paper
Citation:Kelly, Robert J. 'Opening and closing asymmetry: empirical analysis from ISE Xetra'. - Economic & Social Review, Vol. 39, No. 1, Spring, 2008, pp. 55?78, Dublin: Economic & Social Research Institute
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Overnight news yields difficulties for price discovery at market opening culminating in additional return volatility. Biais et al. (2007) show opening prices are sensitive to order flow from the pre-trading session. We investigate the existence of volatility asymmetry between opening and closing returns and trader over-reaction on the Irish Stock Exchange (ISE). Opening on the ISE follows a non-transparent pre-trading session. We estimate opening returns are 10 per cent more volatile than closing returns. This is significantly smaller compared to other exchanges, such as LSE. The LSE operates under a transparent pre-trading session, which is susceptible to order flow manipulation. We implement an ARMA(1,1) framework to investigate the speed of trader reaction to news. Over-reaction is recorded at the morning auction but is smaller in magnitude when compared to international markets with transparent pre-trading and `non-binding? orders. The level of price reversal bolsters the over-reaction argument. We estimate a 30 per cent reversal of overnight returns with one third taking place in the first thirty minutes of trading.
Description:Paper delivered at the Twenty-First Annual Conference of the Irish Economic Association, Bunclody, Co. Wexford, April 25?27, 2007
Author: Kelly, Robert J.
Publisher:Economic & Social Research Institute
Type of material:Conference Paper
Availability:Full text available