Closing Auction, Passive Investing, and Stock Prices

77 Pages Posted: 22 Aug 2019

See all articles by Yanbin Wu

Yanbin Wu

Emory University - Goizueta Business School

Date Written: August 15, 2019

Abstract

Over the last decade, the volume of market-on-close orders has increased to more than 10% of the entire day's trading volume. This paper investigates this rise and documents four stylized facts: (i) passive investing leads to greater usage of market-on-close orders, consistent with passive fund’s motivation for minimizing tracking error; (ii) the price impact from large market-on-close order imbalances is economically large and transitory, leading to short-term price reversal; (iii) a long/short trading strategy exploiting this reversal results in a significant risk-adjusted return of 13.2 basis points per day, consistent with the hypothesis that investors are compensated by providing liquidity to passive funds; and (iv) informed traders also use market-on-close orders, consistent with Admati and Pfleiderer's (1988) prediction that liquidity trades attract informed trades. Overall, the set of findings demonstrates market-on-close order as an important trading channel through which passive investing affects underlying stocks.

Keywords: Closing Auction, Passive Investing, Exchange Traded Funds, Return Predictability

JEL Classification: G11, G12

Suggested Citation

Wu, Yanbin, Closing Auction, Passive Investing, and Stock Prices (August 15, 2019). Available at SSRN: https://ssrn.com/abstract=3440239 or http://dx.doi.org/10.2139/ssrn.3440239

Yanbin Wu (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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