Opening and Closing Asymmetry: Empirical Analysis from ISE Xetra

Robert Kelly

The Economic and Social Review, 2008, vol. 39, issue 1, 55-78

Abstract: 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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eso:journl:v:39:y:2008:i:1:p:55-78

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