The Microstructure of the Irish Stock Market

Abstract

This is the first paper that studies the microstructure of the Irish Stock Market empirically. The motivation for our work is that on 7th of June 2000 The Irish Stock Exchange adopted themodern pan European auction trading system Xetra. Prior to this the exchange utilised an antiquated floor based system. This was an important event for the market as a rich literature exists to suggest that the trading system exerts a strong influence over the behaviour of security returns. We apply the ICSS algorithm of Inclan and Tiao (1994) to discover whether the change to the trading system caused a shift in unconditional volatility at the time Xetra was introduced. We also apply a GARCH model and test for variance changes in the period after Xetra was introduced. Because the trading mechanism can influence volatility in a number of ways we also estimate the partial adjustment coefficients of the Amihud and Mendelson (1987) model prior and subsequent to the introduction of Xetra. We find no evidence of volatility changes associated with the introduction of Xetra. However we do find evidence of an increase in adjustment speeds after the introduction of Xetra.

Keywords: ICSS, Ireland, microstructure, trading system

JEL Classification: G00