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Trading and Returns under Periodic Market Closures

Authors

  • Harrison Hong,

  • Jiang Wang

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    • Hong is from the Graduate School of Business, Stanford University, and Wang is from the Sloan School of Management, Massachusetts Institute of Technology, and NBER. The authors thank Jennifer Huang for programming assistance and an anonymous referee for many valuable suggestions. They also thank Glenn Ellison, John Heaton, Craig Holden, Andrew Lo, Steve Slezak, Jeremy Stein, René Stulz (the editor), the NBER Asset Pricing Lunch Group, and participants of seminars at the London School of Economics, New York University, Princeton University, the University of California at Los Angeles, the University of Houston, the University of Illinois, the University of Pennsylvania, the 1995 WFA meetings, and the Indiana University Symposium on the Organization of Financial Trade and Exchange Mechanism for comments. Hong acknowledges support from an NSF Fellowship and Wang acknowledges support from a Batterymarch Fellowship, NSF grant SES-9414112, and the Laboratory for Financial Engineering at MIT.

Abstract

This paper studies how market closures affect investors' trading policies and the resulting return-generating process. It shows that closures generate rich patterns of time variation in trading and returns, including those consistent with empirical findings: (1) U-shaped patterns in the mean and volatility of returns over trading periods, (2) higher trading activity around the close and open, (3) more volatile open-to-open returns than close-to-close returns, (4) higher returns over trading periods than over nontrading periods, (5) more volatile returns over trading periods than over nontrading periods. It also shows that closures can make prices more informative about future payoffs.

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