A Study of the Impact of Call Auction on Price Discovery and Market Quality

Abstract

The National Stock Exchange of India Ltd (NSE) introduced opening Call Auction (CA) on 18th October 2010 on Nifty stocks. The objective of CA is to discover the efficient opening price and increase market quality. We hypothesise that the CA leads to efficient price discovery. To examine price discovery and market quality, we use Nifty data and adopt market model regression and Cohen et al. (1983a, b) methodology. Following Pagano and Schwartz (2003), we use adjusted R square as the parameter to measure the price discovery. Our results show that the intercept has decreased and the CA dummy co-efficients are positive. Both these results show that the introduction of opening CA on liquid stocks does not improve market quality.

Keywords: Call Auction, Price Discovery, Regression, Intervalling-Effect, Nifty Stocks, Market Quality.

JEL Classification: G12, G15.