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Do call auctions curtail price volatility? Evidence from the National Stock Exchange of India

Camilleri, Silvio John (2015): Do call auctions curtail price volatility? Evidence from the National Stock Exchange of India. Published in: Managerial Finance , Vol. 1, No. 41 (2015): pp. 67-79.

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Abstract

Purpose: This paper empirically investigates whether call auctions which batch orders for simultaneous execution, may restrain stock market volatility.

Design / Methodology / Approach: We use high frequency data to investigate volatility changes following the suspension of opening and closing call auctions on the National Stock Exchange of India in June 1999. We evaluate this issue by considering both modelled and realised volatility. Using a GARCH approach we model intra-day volatility for the trading days preceding and succeeding the auction suspension. We also scrutinise return distributions to look for volatility changes during different parts of the day.

Findings: When interpreted collectively, our empirical results suggest that the auction suspension was followed by reduced volatility particularly in the middle of the trading day and at the closing.

Practical implications: Given that auctions are often incorporated in trading systems with the aim of curtailing volatility, our main conclusion, that the auction suspension was followed by lower volatility, has important practical inferences. Auctions cannot be automatically relied on to reduce volatility. The intricacies of the auction protocol and their interaction with ancillary market microstructure features may impact on auction efficacy.

Originality / value: The paper adopts a novel approach towards assessing the effectiveness of call auctions by considering an unusual occurrence of an auction suspension. The empirical setting enables a clear comparison of the respective regimes since the auction and the post-suspension period do not materially differ in other subsidiary aspects. This is a noteworthy factor, since the empirical contexts considered in prior studies, often feature several simultaneous changes.

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