Information transfer,microstmctures and intraday price return spikes

Previous research has identified overnight public information as the cause of higher opening returns and mean reversion in security markets. This paper tests this hypothesis by using an intervention and transfer function time series model to filter out the dynamic effects of an overnight information set on the opening, and subsequent, intraday AOI stock and SPI futures intraday price returns. A further research objective was to analyse the process by which information is transferred into prices and whether there is a differential impact across stock and futures markets. It was determined that the information contained in the overnight US stock market had: (i) a differential impact on the Australian stock and futures market, and (ii) after filtering out the impact of overnight information, a significant reversal tendency remained in both markets after opening. Further analysis supported the conclusion that price spikes at opening were not wholly related to overnight information. Other possible explanations, such as different trading mechanisms, did not provide a satisfactory explanation. Overall, it appears that the uncertainty participants face at the beginning of a trading session may induce a number of subtle market reactions (both rational and irrational), in markets with different microstmctures and trading clientele.