The effects of randomizing the opening time on the performance of a stock market under stress |
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Authors: | Shmuel Hauser Avraham Kamara Itzik Shurki |
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Institution: | 1. The Israel Securities Authority, 22 Kanfei Nesharim Street, Jerusalem 95464, Israel;2. Ono Academic College, Kiryat Ono, Israel;3. Michael G. Foster School of Business, Paccar Hall, University of Washington, Box 353226, Seattle, WA 98195-3226, USA |
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Abstract: | To tackle challenges from derivatives trading and illiquidity, reduce manipulation and improve price discovery, many exchanges have started opening at random times. We investigate how randomization has affected the performance of the Tel Aviv Stock Exchange at trade opening and at the expiration of stock-index derivatives. Randomization has improved price discovery and reduced excess volatility and price distortion, especially on expiration dates. Although preopening prices do not converge to full information values, post-randomization, opening prices on expiration days are at least as accurate as on other days. Spot market trading systems significantly impact the effects of derivatives on spot prices. |
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