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Effectiveness of Closing Call Auctions: Evidence from the Taiwan Stock Exchange

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  • Yu Chuan Huang
  • Pei Lin Tsai

Abstract

To reduce market volatility observed at the close of trading and to enhance the fairness of the closing price, the Taiwan Stock Exchange (TSE) changed the way it executed its closing transactions by instituting a five-minute closing call auction. This paper examines the effectiveness of this new mechanism for the TSE. The empirical results show that the closing call has effectively reduced market volatility at closing and enhanced market efficiency by reducing noise in stock closing prices. However, market liquidity has declined, primarily due to the actions of individual investors. Because the limit order book is fully opaque for the five-minute call period, investors may close their position earlier than the closing period to avoid additional risk. This implies that, to maximize the benefits of the closing call, the TSE should provide the transparency of the limit order book for the closing call period.

Suggested Citation

  • Yu Chuan Huang & Pei Lin Tsai, 2008. "Effectiveness of Closing Call Auctions: Evidence from the Taiwan Stock Exchange," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(3), pages 5-20, May.
    • Handle: RePEc:mes:emfitr:v:44:y:2008:i:3:p:5-20
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    Citations

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    Cited by:

    1. Mansoor Ahmed & Anirudh Sriram & Sanjay Singh, 2020. "Short Term Firm-Specific Stock Forecasting with BDI Framework," Computational Economics, Springer;Society for Computational Economics, vol. 55(3), pages 745-778, March.
    2. Chun-Da Chen & Alex YiHou Huang & Chih-Chun Chen, 2011. "The Effects of Abolishing a Foreign Institutional Investment Quota in Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(2), pages 74-98, March.
    3. Chuang, Wen-I & Lee, Hsiu-Chuan, 2010. "The Impact of Short-Sales Constraints on Liquidity and the Liquidity-Return Relations," Pacific-Basin Finance Journal, Elsevier, vol. 18(5), pages 521-535, November.
    4. Jiayi Li & Sumei Luo & Guangyou Zhou, 2021. "Call auction, continuous trading and closing price formation," Quantitative Finance, Taylor & Francis Journals, vol. 21(6), pages 1037-1065, June.
    5. Yu Chuan Huang & Shu Hui Chan, 2014. "The Trading Behavior of Attention Securities with Different Closing Mechanisms: Evidence from Taiwan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(04), pages 1-16.
    6. John F. Pinfold & Danyang He, 2012. "The impact of introducing a pre‐close on the New Zealand share market," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 20(1), pages 99-110, February.
    7. Yu Chuan Huang & Shu Hui Chan, 2010. "Trading Behavior on Expiration Days and Quarter-End Days: The Effect of a New Closing Method," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(4), pages 105-125, January.
    8. Serkan İmişiker & Rasim Özcan & Bedri Kamil Onur Taş, 2015. "Price Manipulation by Intermediaries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(4), pages 788-797, July.
    9. Chan, Shu Hui & Huang, Yu Chuan & Lin, Sheng-Min, 2020. "Market transparency and closing price behavior on month-end days: Evidence from Taiwan," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    10. Cheng-Yi Chien, 2013. "Pre-close Transparency and Price Efficiency at Market Closing: Evidence from the Taiwan Stock Exchange," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(2), pages 17-26.
    11. Hsiu‐Chuan Lee & Cheng‐Yi Chien & Tzu‐Hsiang Liao, 2009. "Determination of stock closing prices and hedging performance with stock indices futures," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(4), pages 827-847, December.
    12. Eyup Kadioðluu & Guray Kuçukkocaoglu & Saim Kilic, 2015. "Closing price manipulation in Borsa Istanbul and the impact of call auction sessions," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 15(3), pages 213-221, September.
    13. Isa E. Hafalir & Serkan Imisiker, 2022. "Call Auctions with Contingent Orders," Games, MDPI, vol. 13(5), pages 1-8, September.

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