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.
| Original language | English |
|---|---|
| Pages (from-to) | 392-415 |
| Number of pages | 24 |
| Journal | Journal of Financial Markets |
| Volume | 15 |
| Issue number | 4 |
| DOIs | |
| State | Published - Nov 2012 |
| Externally published | Yes |
Bibliographical note
Funding Information:Opinions expressed in this paper do not necessarily reflect the position of the Israel Securities Authority. We thank the Editor and referees, Yakov Amihud, Batia Filo, Ronen Madar, Amir Rubin, Orly Sade, Sunil Wahal, and seminar participants at the University of Washington, the Pacific Northwest Finance Conference and the 2008 meeting of the Western Finance Association for their helpful comments. We thank Lew Thorson and Kara Ralston for their assistance. A. Kamara thanks the CFO Forum and the Global Business Center at the University of Washington for their financial support.
Keywords
- Manipulation
- Preopening and opening price discovery
- Random opening time
- Stock index derivatives