Impact of the Introduction of Call Auction on Price Discovery: Evidence from the Indian Stock Market Using High-Frequency Data
32 Pages Posted: 13 Dec 2012 Last revised: 15 Dec 2012
Date Written: December 12, 2012
Abstract
Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. Its advantage, however, comes at the cost of immediacy. The impact of the introduction of call auction has not been found uniformly beneficial, possibly due to poor design or due to “thick market externalities”. This paper examines the recent re-introduction of opening call auction at the National Stock Exchange of India. This was advocated based on the evidence of positive effect of call auction on market quality at phases with high volatility or information asymmetry. The results suggest that the intraday pattern of volume and volatility in the continuous market remains unchanged even after the introduction of the call. The volatility and volume still take about 30 minutes to stabilize and the auction attracts very little volume. There is excess price movement in the call auction as suggested by the negative intraday return correlations. However, the synchronicity of price discovery, on the lines of Pagano and Schwartz (2003), indicates some improvement in the market quality. Possibly, the no all-round improvement of price discovery could be attributed to the extremely short duration of the call auction. The paper contributes to the understanding of the impact of opening call auction on market quality.
Keywords: Call Auction, Market Opening, Market Effciency, Intraday Behaviour, Emerging Markets
JEL Classification: G12, G14, G15
Suggested Citation: Suggested Citation
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