The Efficiency of Opening Auctions: An Econometric Approach

This paper tests different auction designs within the call auction class using around the clock 5-minute price dynamics of stocks listed on the FTSE or S&P / ASX 200 index. We propose a structural model that allows for various features in high frequency time series for stock prices, including unobserved price dynamics, multiple persistent stochastic volatility factors, correlated jumps across prices and volatilities, the leverage effect, daily patterns, Monday open effects, and heavy-tailed error distributions. We show that the Australian Security Exchange (ASX) utilises a superior auction design over the Johannesburg Stock Exchange (JSE) in terms of reducing opening price volatility, reducing over-weekend price uncertainty, pre-open market price discovery, and auction price efficiency. We, however, show that none of the two auction designs is sufficient in producing a consensus and stable opening price. Lastly, enticing more active auction participants is a key factor in managing an effective call auction.