Explaining volatility and serial correlation in opening and closing returns: a study of the FT-30 components

Patricia Chelley-Steeley*

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

In this paper the performance of opening and closing returns, for the components of the FT-30 will be studied. It will be shown that for these stocks opening returns have higher volatility and a greater tendency towards negative serial correlation than closing returns. Unlike previous studies this contrasting performance cannot solely be attributed to differences in the trading mechanism across the trading day. All the stocks used in our sample trade thought the day using a uniform trading mechanism. In this paper, we suggest that it is differences in the speed that closing and opening returns adjust to new information that causes differences in return performance. By estimating the Amihud and Mendelson (1987) [Amihud, Yakov, & Mendelson, Haim (1987). Trading mechanisms and stock returns: An empirical investigation, Journal of Finance, 62 533-553.] partial adjustment model with noise, we show that opening returns have a tendency towards over-reaction, while closing returns have a tendency towards under-reaction. We suggest that it is these differences that cause a substantial proportion (although not all) of the asymmetric return patterns associated with opening and closing returns. © 2005 Elsevier Inc. All rights reserved.

Original languageEnglish
Pages (from-to)1-15
Number of pages15
JournalGlobal Finance Journal
Volume16
Issue number1
Early online date14 Jun 2005
DOIs
Publication statusPublished - Aug 2005

Keywords

  • close-to-close
  • FT-30
  • open-to-open
  • overreaction
  • serial correlation
  • volatility

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