Yakov Amihud, Haim Mendelson, Beni Lauterbach
ABSTRACT
This paper examines the value effects of improvements in the trading
mechanism. Stocks on the Tel Aviv Stock Exchange were transferred gradually
from a daily call auction to a mechanism where the call auction was followed
by iterated continuous trading sessions. This event was associated with
a positive and permanent price appreciation. The cumulative average market-adjusted
return over a period that started five days prior to the announcement and
ended 30 days after the stocks started trading by the new method was approximately
5.5%. In addition, we find positive liquidity externalities (spillovers)
across related stocks, and improvements in the value discovery process
due to the improved trading method. Finally, there was a positive association
between liquidity gains and price appreciation. Our results suggest that
improvements in market microstructure are valuable.
Amihud: (212) 998-0720
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