Should We Use Closing Prices? Institutional Price Pressure at the Close

Abstract

The closing price is the most important stock price of the day, but is it better than alternatives? Closing prices are determined in a special call auction. This single trade accounts for 7.3% of daily stock volume in 2018 and is strongly associated with ETF ownership and institutional rebalancing. Strikingly, this huge volume contributes little to price discovery. Closing prices frequently and significantly deviate from closing quote midpoints, but these deviations on average fully revert overnight. These deviations are economically significant and make a difference for two applications that we consider: ETF mispricing, and put-call parity violations and their ability to predict next-day stock returns. Our results raise concerns about an overwhelming reliance on closing prices and highlight the costs of indexing.

Keywords: closing price, closing auction, price efficiency, institutional trading

JEL Classification: G11, G12, G14