A Theory of the Dynamics of Security Returns around Market Closures

Slezak, Steve L.

doi:10.1111/j.1540-6261.1994.tb02451.x

Cited by 51 publications

(40 citation statements)

References 23 publications

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“…The contribution to price discovery of the NYSE reaches as high as 70% (and thus overtakes NASDAQ for part of the day), while the share of NASDAQ drops as low as 20%. The estimated latent price innovation variance follows a U-shaped intraday pattern, which is consistent with the literature (see, e.g., Admati and Pfleiderer, 1988;Foster and Viswanathan, 1993;Slezak, 1994): The average innovation variance in the first half hour is about five times larger than the rest of the day.…”

Section: Introductionsupporting

confidence: 77%

“…The estimated innovation variance curve follows a pronounced U-shaped pattern. This pattern has a sound theoretical basis, as the informed trading literature documents such a U-shaped intraday innovation variance with a big peak at the start of the day (Admati and Pfleiderer, 1988;Foster and Viswanathan, 1993;Slezak, 1994). The noise variance estimates of the NYSE and REST groups also follow similar U-shaped patterns.…”

Section: Time-varying Information Sharesmentioning

confidence: 73%

“…On the one hand, a number of asymmetric information models noted this pattern as an empirical prediction for markets with informed and uninformed traders (Admati and Pfleiderer, 1988;Foster and Viswanathan, 1993;Slezak, 1994). On the other hand, Hsieh and Kleidon (1996) document several dynamics unrelated to informed trading which aid to the formation of this intraday volatility pattern.…”

Section: Intraday Variation In Information Sharesmentioning

confidence: 99%

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Intraday Price Discovery in Fragmented Markets

2014

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Section: Introductionsupporting

confidence: 77%

Section: Time-varying Information Sharesmentioning

confidence: 73%

Section: Intraday Variation In Information Sharesmentioning

confidence: 99%

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Intraday Price Discovery in Fragmented Markets

2014

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“…The contrast has been acknowledged already in various theoretical models of security returns (Oldfield and Rogalski, 1980;Slezak, 1994;Hong and Wang, 2000).…”

Section: Introductionmentioning

confidence: 95%

Overnight News and Daily Equity Trading Risk Limits

Ahoniemi¹,

Fuertes

Olmo

2012

SSRN Journal

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent repository link AbstractThis paper proposes a new bivariate modeling approach for setting daily equity-trading risk limits using high-frequency data. We construct one-day-ahead Value-at-Risk (VaR) forecasts by taking into account the different dynamics of the overnight and daytime return processes and their covariance. The covariance is motivated by market microstructure effects such as price staleness and news spillover. Among the competitors we include a simpler bivariate model where the overnight return is redefined by moving the open price further into the trading day, and a univariate model based on the close-to-close return and an overnight-adjusted realized volatility. We illustrate the different approaches using data on the S&P 500 and Russell 2000 indices. The evidence in favour of modeling the covariance is more convincing for the latter index due to the lower trading volumes and, relatedly, the less efficient price discovery at market open for small-cap stocks.

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“…The implications of price limits may also be relevant to the literature on market closure because the trigger of price limit interrupts continuous trading. Slezak (1994), for example, uses a multi-period model on market closure and predicts that market closures increase pre-closure trading volume because closures will delay the resolution of information uncertainty and impose more risk on both informed and uninformed traders. This idea is also reflected in Subrahmanyam (1995), in which he notes that discretionary closures can bring more information into the closure decision and therefore they can be less susceptible to the magnet effect than rule-based halts.…”

mentioning

confidence: 99%

An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data

Liu

Rhee

2005

SSRN Journal

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We examine the existence and the forms of the magnet effect using transaction files and limit order book of the Korea Stock Exchange. A significant magnet effect exists in all five market microstructure variables (the rate of return, trading volume, volatility, order flow, and order type) when the limit hit becomes imminent. Specifically, investors place increasingly more orders, choose proportionally more market orders, and frequently reposition existing orders to advance transactions. We also find that: (i) a narrower price limit exhibits higher acceleration rates in all five variables compared to a wider price limit; and (ii) the upper limit hits draw heavier volumes of transactions, order submissions and market orders than the lower limit hits. We confirm that the magnet effect is a phenomenon unique only to markets with daily price limit systems. 1Starting from its initiation, a price limit is imposed as a means to curb excessive price movement and prices being carried too far away. Recently price limits have been implemented in a majority of the Asian and European stock markets. The implications of price limits on market liquidity, volatility and price discovery processes have drawn a great deal of attention from market participants, regulators and scholars. 1In practice, most stock exchanges have undergone repeated changes in price limit rules. For example, the Taiwan Stock Exchange used eleven different daily price limits since 1962 with its most recent change from 5% to 7% in 1989; the Stock Exchange of Thailand raised the price limit from 10% to 30% at the end of 1997; the Korea Stock Exchange (KRX) raised it from 4.6% to 15% in four phases from 1995 to 1999 and its most recent change from 12% to 15% was implemented on December 7, 1998.Most of past studies on price limits are limited to the analysis of daily price movements and the primary focus is on the post-limit-hit period, which leaves one important aspect of price limits largely unexplored, i.e., the magnet effect or the gravitational effect. Therefore, the discussions of the magnet effect in earlier studies are mostly conjectural. Miller (1991) states that circuit breakers could be self-fulfilling if traders rush to avoid being locked into their positions when prices come in the range of the trigger point. Greenwald and Stein (1991) note that the magnet effect makes circuit breakers vulnerable to criticism in that the very existence of a circuit breaker might somehow cause large declines to feed on themselves and cause the market to crash.2 Gerety and Mulherin (1992) also point out that the possibility of a trading halt after a price change of a given percent would make investors generally nervous and prone to leave the market more quickly compared to a situation where a circuit breaker did not exist.1 The early studies on price limits date back to the 1970s. See, for example, Hieronymus (1971).2 The theories on circuit breakers can be applicable to the price limits because of the similarities in their functionality. Both of them cu...

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A Theory of the Dynamics of Security Returns around Market Closures

Cited by 51 publications

References 23 publications

Intraday Price Discovery in Fragmented Markets

Intraday Price Discovery in Fragmented Markets

Overnight News and Daily Equity Trading Risk Limits

An Anatomy of the Magnet Effect: Evidence from the Korea Stock Exchange High-Frequency Data

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