Impact of the Introduction of Call Auction on price discovery: Evidence from the Indian Stock Market Using High-Frequency Data

Abstract

Call markets are claimed to aggregate information and facilitate price discovery where continuous markets may fail. Its advantage, however, comes at the cost of imme- diacy. Possibly due to faulty design or due to \thick market externalities", the impact of the introduction of call has not been found uniformly bene cial. This paper exam- ines the recent re-introduction of opening call auction at the National Stock Exchange of India. This was advocated based on the supportive evidence of the positive e ect of call auction at the time of high market volatility or information asymmetry. The results suggest that the intraday pattern of volume and volatility in the continuous market remains unchanged even after the introduction of call market. The volatility and volume still takes about 30 minutes to stabilize and the auction attracts very little volume. The negative intraday return correlations suggest excessive price movement at the call auction. However, the synchronicity of price discovery, on the lines of Pagano and Schwartz (2003), indicates some improvement in the market quality. Possibly, the no all-round improvement of price discovery could be attributed to the extremely short duration of the auction. The paper contributes to the understanding of the impact of opening call auction on market quality.