The Extended Opening Session of the Futures Market and Stock Price ...

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex

Review of Pacific Basin Financial Markets and Policies Vol. 12, No. 3 (2009) 403–416 c World Scientific Publishing Co. and Center for Pacific Basin Business, Economics and Finance Research

The Extended Opening Session of the Futures Market and Stock Price Behavior: Evidence from the Taiwan Stock Exchange

Hsiu-Chuan Lee Finance Department, Ming Chuan University 250, Zhong-shan N. Road, Sec. 5 Taipei 111, Taiwan [email protected] Cheng-Yi Chien∗ Department of Finance, Feng Chia University 100, Wenhwa Road, Taichung 407, Taiwan [email protected] Hsiang-Lan Chen Department of Finance, National Kaohsiung First University of Science and Technology 2, Jhuoyue Road, Nanzih District Kaohsiung 811, Taiwan [email protected] Yen-Sheng Huang Department of Business and Management Ming Chi University of Technology 84, Gungjuan Road, Taishan Taipei 243, Taiwan [email protected] This paper examines how the introduction of the extended opening session of the futures market affects stock price behavior around the market opening. On January 1, 2001, the Taiwan Futures Exchange (TAIFEX) extended the trading hours by opening earlier 15 minutes than the Taiwan Stock Exchange (TWSE). This change presents an opportunity to analyze how the extended opening session ∗

Corresponding author. 403

September 10, 2009

15:33

WSPC/155-RPBFMP

404 • Hsiu-Chuan Lee et al.

of futures market affects stock price behavior. Compared with the pre-extension period, the empirical results show that stock returns are less volatile and return autocorrelations are less positively correlated around the stock market opening. Moreover, overreaction for opening prices of the stock market is mitigated in the post-extension period. Finally, unexpected futures returns during the extended opening session can predict overnight stock returns. Overall, the empirical results are consistent with Foster and Viswanathan (1990) in that informed traders will trade aggressively at the market opening. Keywords: Extended opening session of futures market; stock price behavior; informed traders. JEL Classification: G14, G15, G18

1. Introduction The issue of the extended trading hours for futures markets has received much attention in the existing literature. Hiraki et al. (1995) and Cheng et al. (2004) found that unexpected returns for the extended futures trading sessions could predict stock returns and thus suggested that the extended futures trading sessions contained useful private information. Chan (2005) found that trading activities during the extended opening session of the futures market are related with private information (or informed traders). On the other hand, the intraday patterns of stock prices have attracted much attention from academics and practitioners. The intraday pattern of stock prices is consistent with the information asymmetry of market microstructure (Foster and Viswanathan, 1990). Foster and Viswanathan (1990) suggested that informed traders who acquired private information in the non-trading period tended to trade more aggressively if they believed private information would become public information quickly. Hence, higher return volatility (e.g., Foster and Viswanathan, 1993; and Ke et al., 2004) and more positive autocorrelation (e.g., Rhee and Wang, 1997; and Ke et al., 2004) occur around the market opening. Despite the vast literature on the relationship between extended futures returns and overnight stock returns, there is little research on the impact of the extended opening session of the futures market on the intraday patterns of stock prices surrounding the stock market opening. The purpose of this paper is to examine how the introduction of the extended opening session of the futures market affects stock price behavior surrounding the stock market opening. As documented by Foster and

00168.tex

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex

Futures Market and Stock Price Behavior • 405

Viswanathan (1990), we argue that informed traders tend to shift their orders from stock market to the extended opening session of the futures market when the futures market extends the trading hours by opening earlier than the underlying cash market (Cheng et al., 2004). Moreover, Daniel et al. (1998) suggested that trading activities of informed traders would affect asset price behavior. Accordingly, it is likely that the introduction of the extended opening session of the futures market can affect stock price behavior around market opening. On January 1, 2001, the Taiwan Futures Exchange (TAIFEX) extended the trading hours of its futures contracts by opening earlier 15 minutes than the Taiwan Stock Exchange (TWSE). This change provides a unique opportunity to examine how the extended opening session of the futures market affects stock price behavior around market opening. The remainder of this paper is organized as follows. Section 2 provides a brief literature review. Section 3 develops the hypotheses. Sections 4 and 5 describe the data and methodology, respectively. The empirical results are presented in Section 6. The last section concludes this paper. 2. Literature Review Some researchers focus on whether the extended futures trading sessions contain useful private information. Hiraki et al. (1995) examined the information content of end-of-day index futures returns. Using data from the Osaka Nikkei 225 futures contracts and overnight spot returns, they found a significant and positive relationship between unexpected component of end-of-day future returns and subsequent spot returns. They suggested that the end-of-day futures returns contained private information, which was partially revealed through trading. Cheng et al. (2004) extended the model from Hiraki et al. (1995) and examined the information content for the extended futures trading. Using data from the Hang Seng Index and Hang Seng Index Futures, they documented that the extended futures trading sessions contained private information in explaining subsequent spot returns during the trading day. Recently, using data from the Hong Kong futures market, Chan (2005) investigated futures price behavior during the extended futures trading. Chan (2005) found an increase in trading volume, reduction in futures volatility, and insignificant change in price errors during the extended opening session. These results indicated that trading activities during the extended opening session are related with private information.

September 10, 2009

15:33

WSPC/155-RPBFMP


On the other hand, prior literature investigated the intraday patterns of stock prices. Foster and Viswanathan (1990) suggested that informed traders who acquire private information in the non-trading period tend to trade more aggressively if they believe private information will become public information quickly. Using data from the New York Stock Exchange, Foster and Viswanathan (1993) found that a higher return volatility surrounding the opening of the stock market was associated with informed traders. Rhee and Wang (1997) argued that a higher autocorrelation surrounding the opening of the stock market was related with informed trader. Using data from the TWSE, they found that autocorrelation was higher around market opening. Similarly, using data from the TWSE, Ke et al. (2004) found that return volatility and autocorrelation were higher surrounding the opening of the TWSE. In summary, the issues of the extended futures trading hours and the intraday pattern of stock prices have received much attention in the literature. However, only a limited amount of work has been conducted on the impact of the extended opening session of the futures trading on its underlying asset price behavior. Accordingly, this paper attempts to fill this gap.

3. Hypotheses Daniel et al. (1998) developed a model to describe the relationship between trading activities of informed traders and security price behavior. Their model proposed that when informed traders are overconfident with respect to their private information, stock prices tend to overreact and return volatility will increase. Moreover, Daniel et al. (1998) indicated that the continuing overreaction led to positive autocorrelation.1 As suggested by Foster and Viswanathan (1990), we argue that informed traders tend to shift their orders from stock market to the extended opening session of the futures market when the futures market extends the trading hours by opening earlier than the underlying cash market. Hence, as proposed by Daniel et al. (1998), when informed traders shift their orders from stock market to the futures market, the impact of informed traders on stock prices will be reduced. Accordingly, overreaction for stock market will be mitigated in the postextension period, and stock returns will become less volatile and return

1

As further public information arrived, the initial overreaction was gradually reversed in the long run and stock prices had a tendency towards fundamentals.

00168.tex

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


autocorrelations will become less positive surrounding the stock market opening in the post-extension period.2,3 H1: Smaller return volatility and less positive autocorrelation surrounding the stock market opening can be expected in the post-extension period. Chelley-Steeley (2005) and Theobald and Yallup (2005) found that opento-open stock returns had a tendency towards overreaction. Theobald and Yallup (2005) further suggested that overreaction for open-to-open stock returns was consistent with the overconfidence rationale developed by Daniel et al. (1998). Hence, if informed traders shift their orders from stock market to the futures market, the impact of informed traders on stock prices will be reduced, and overreaction for open-to-open stock returns will be mitigated in the post-extension period. H2: Overreaction for open-to-open stock returns will be mitigated in the post-extension period. Hiraki et al. (1995) and Cheng et al. (2004) reported that unexpected futures returns of the extended trading hours were positively correlated to overnight returns of the stock market. They thus suggested that this result was caused by informed traders. Hence, if informed traders shift their orders from stock market to the extended opening session, unexpected futures returns of the extended opening session are expected to contain private information in predicting overnight spot returns. H3: Unexpected futures returns of the extended opening session can predict overnight stock returns. 4. Data The Taiwan Stock Exchange Capitalization Weighted Stock Index and the Taiwan Index Futures contracts traded on the TAIFEX are used in this paper. The sample period covers almost four years from March 1, 1999 to 2 The issue of the relationship between information flow and price volatility is also addressed at the theoretical level by Ross (1989). In Ross’s model, the variance of price change will be positively related to the rate of information flow. This implies that a positive relationship exists between return volatility and private information (Hiraki et al., 1995). 3 Barclay and Warner (1993) and Rhee and Wang (1997) suggested that when informed traders broke up their trades and distributed them over time to lower the price impact of their trades, return autocorrelations would be more positively correlated.

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


December 31, 2002 (or a total of 967 trading days). The first sample period of almost two years, from March 1, 1999 to December 30, 2000 (or a total of 485 trading days), corresponds to the pre-extension period of the TAIFEX. In the first sample period, the trading hours of the TWSE and TAIFEX are from 9:00 am to 12:00 am and from 9:00 am to 12:15 pm respectively. The second sample period of the following two years, from January 2, 2001 to December 31, 2002 (or a total of 482 trading days), corresponds to the postextension period of the TAIFEX. In the second sample period, the trading hours of the TWSE and TAIFEX are from 9:00 am to 1:30 pm and from 8:45 am to 1:45 pm respectively. Intraday data of the Taiwan Stock Exchange Capitalization Weighted Stock Index and the Taiwan Index Futures contracts are obtained from the TWSE and TAIFEX, respectively. For futures contracts, the nearby futures trading contracts are used. The nearby futures contracts are rolled over to the next nearby contract five trading days before expiration to avoid the potential expiration effect. 5. Methodology 5.1. Volatility and autocorrelation of stock returns To estimate the volatility and autocorrelation of stock returns, the return series are first calculated for each one-minute interval in the trading day based on transaction price data. Intraday return over the one-minute period is calculated as follows:4 Ri,t = ln(Pi,t /Pi−1,t ),

(1)

where Pi,t represents the intraday closing price on day t in interval i. The standard deviation (SD) of stock returns for five-minute interval is calculated by rolling in each trading day. To control for the potential confounding impact of different market conditions in the two sub-periods, the standardized standard deviation (SSD) is utilized as in Chan et al. (1995) and Chan (2005). The SSD is calculated by subtracting the mean SD from the SD and dividing by the corresponding standard error as follows: SSD = (SD − MSD)/SESD, where the mean SD (MSD) and the standard error of SD (SESD) are estimated from the five-minute series of SD for each 4 The first transaction price in each trading day is revealed at 9:01 am in the TWSE. The first transaction price in each trading day is revealed at 9:00 am and 8:45 am for the first and second sample period in the TAIFEX, respectively.

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


trading day. These SSDs are then averaged across trading days for each sub-period of the sample. Similarly, return autocorrelations for 10-minute interval is computed by rolling in each trading day. Then, the autocorrelations are averaged across the trading days for each sub-period of the sample. To test the equality of volatility and autocorrelations between the preand post-extension periods, both the t-tests and Wilcoxon tests are used in this study. Since the t-tests and the Wilcoxon tests give similar results, this study only reports t-tests results for brevity. 5.2. Estimation of overreaction for open-to-open returns The partial adjustment model developed by Amihud and Mendelson (1987) is used to identify overreaction for open-to-open returns (Chelley-Steeley, 2005; Theobald and Yallup, 2004; and Theobald and Yallup, 2005). The partial adjustment model is considered as follows: Pt − Pt−1 = g(Vt − Pt−1 ) + ut ,

(2)

where Pt is the logarithm of the observed price on day t; Vt is the logarithm of the intrinsic value on day t; ut is the white noise of pricing error on day t; E(ut ) = 0; Var(ut ) = σ 2 ; and g is the price adjustment coefficient, 0 < g < 2. Theobald and Yallup (2004) and Chelley-Steeley (2005) suggested that the partial adjustment model can be estimated by ARMA (1,1) process. Hence, Equation (2) can be written as the following ARMA (1,1) process: Rt = α1 + α2 Rt−1 − α3 εt−1 + εt ,

(3)

where Rt is the asset return on day t, εt is the white noise on day t, and g = (1 − α2 ), 0 < g < 2. To estimate overreaction for opening price, asset returns can be replaced with open-to-open stock returns. Moreover, this paper uses the GARCH (1,1) model to reduce the problem of heteroscedasticity.5 ,6 Thus, Equation (3) can be rewritten as follows: OTOSRt = α1 + α2 OTOSRt−1 − α3 εt−1 + εt , ht = β1 + β2 ε2t−1 + β3 ht−1 ,

(4)

where OTOSRt is the open-to-open stock return on day t; εt is the residual on day t; ht is the conditional variance on day t; and g = (1 − α2 ), 0 < g < 2. When α2 is statistically different from zero, we can conclude that 5

We find that the problem of heteroscedasticity exits in the ARMA process. Theobald and Yallup (2005) also used the ARMA-GARCH model to estimate price adjustment coefficient. 6

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


g = (1 − α2 ). When α2 is not statistically different from zero, we can conclude that g = 1. The stock prices have a tendency towards underreaction if 0 < g < 1. The stock prices fully reflect relevant information if g = 1. The stock prices have a tendency towards overreaction if 1 < g < 2.

5.3. Estimation for unexpected futures returns in the extended opening session This paper employs the econometric model as in Cheng et al. (2004) to investigate the information content in the extended opening session of the futures market. Cheng et al. (2004) used unexpected futures returns during the extended trading hours as the proxy of private information. The unexpected futures return for the extended closing session (UEFRECS) is extracted as follows: FRECSt = α1 + α2 FRTPt + εt , ht = β1 + β2 ε2t−1 + β3 ht−1 ,

(5)

where FRECSt is the futures return during the extended closing session from 1:30 pm to 1:45 pm on day t; FRTPt is the futures return during the trading period from 9:00 am to 1:30 pm on day t; εt is the residual on day t; and ht is the conditional variance on day t. The residual in Equation (5) is the unexpected futures return during the extended closing session. Similarly, the unexpected futures return for the extended opening session (UEFREOS) can be extracted using GARCH (1,1) model: FREOSt = α1 + α2 FRECSt−1 + SPRt−1 + εt , ht = β1 + β2 ε2t−1 + β3 ht−1 ,

(6)

where FREOSt is the futures return during the extended opening session from 8:45 am to 9:00 am on day t; FRECSt is the futures return during the extended closing session from 1:30 pm to 1:45 pm on day t; SPRt is the S&P 500 index return on day t;7 εt is the residual on day t; and ht is the conditional variance on day t. The residual in Equation (6) is the unexpected futures return for the extended opening session. Finally, private information of the extended opening session of the futures market can be tested by the 7

Data of the S&P 500 index is obtained from the Taiwan Economic Journal (TEJ).

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


following equation: ONSRt = α1 + α2 UEFREOSt + α3 UEFRECSt−1 + α4 SPRt−1 + εt , ht = β1 + β2 ε2t−1 + β3 ht−1 ,

(7)

where ONSRt is the overnight stock return on day t; UEFREOSt is the unexpected futures return for the extended opening session on day t; UEFRECSt is the unexpected futures return for the extended closing session on day t; SPRt is the S&P 500 index return on day t; εt is the residual on day t; and ht is the conditional variance on day t. If the extended opening session of the futures market contains private information, the regression coefficient of α2 is significantly positive in Equation (7). 6. Empirical Results 6.1. Volatility and autocorrelation of stock returns Table 1 reports the equality of stock return volatility for the two sub-periods. The results indicate that stock return volatility during the time period from 9:02 am to 9:07 am is significantly smaller in the post-extension period than in the pre-extension period. The differences in return volatility between two sub-periods are 1.7486 and 0.5261 for the time periods from 9:02 am to Table 1.

Standardized standard deviation of stock returns for the two sub-periods.

Time

Pre-Extension Period (1)

Post-Extension Period (2)

Difference (1) − (2)

09:02∼09:06 09:03∼09:07 09:04∼09:08 09:05∼09:09 09:06∼09:10 09:07∼09:11 09:08∼09:12 09:09∼09:13 09:10∼09:14 09:11∼09:15

3.3033 1.4954 0.8343 0.6378 0.5533 0.4983 0.5106 0.4279 0.3713 0.3415

1.5547 0.9693 0.6771 0.6268 0.5718 0.5188 0.4834 0.3875 0.3385 0.3397

1.7486∗∗∗ 0.5261∗∗∗ 0.1572 0.0110 −0.0185 −0.0205 0.0272 0.0404 0.0328 0.0018

This table reports the standardized standard deviation (SSD) of stock returns for the two sub-periods. The “pre-extension period” is from March 1, 1999 to December 30, 2000 and the “post-extension period” is from January 2, 2001 to December 31, 2002. The t-statistics are used to test the “difference” in each time interval. ∗∗ Significant at the 5% level. ∗∗∗ Significant at the 1% level.

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex

412 • Hsiu-Chuan Lee et al. Table 2.

Return autocorrelations for the two sub-periods.

Time

Pre-Extension Period (1)

Post-Extension Period (2)

Difference (1) − (2)

09:02∼09:11 09:03∼09:12 09:04∼09:13 09:05∼09:14 09:06∼09:15

0.3652 0.3106 0.3157 0.3250 0.2986

0.1685 0.1500 0.1721 0.1720 0.1574

0.1967∗∗∗ 0.1606∗∗∗ 0.1436∗∗∗ 0.1530∗∗∗ 0.1421∗∗∗

This table reports the autocorrelation of stock returns for the two sub-periods. The “pre-extension period” is from March 1, 1999 to December 30, 2000 and the “postextension period” is from January 2, 2001 to December 31, 2002. The t-statistics are used to test the “difference” in each time interval. ∗∗ Significant at the 5% level. ∗∗∗ Significant at the 1% level.

9:06 am and from 9:03 am to 9:07 am respectively. The difference values for 1.7486 and 0.5261 are significant at the 1% level. Table 2 shows the equality of autocorrelations for the two sub-periods. The results indicate a less positive autocorrelation in the post-extension period. The difference values for all time periods are all significant at the 1% level. These findings suggest that the extended opening session of the futures market has a significant impact on autocorrelation around market opening. 6.2. Overreaction for open-to-open returns Table 3 presents the results of overreaction for open-to-open stock returns. The empirical results show that the open-to-open stock returns tend to overreact in the first sub-period and open-to-open stock returns have a tendency towards intrinsic value in the second sub-period. The value of price adjustment coefficient in the first sub-period is 1.7528. Because the price adjustment coefficient is larger than one in the first sub-period, the stock market overreacts around market open in the pre-extension period. This result is consistent with Chelley-Steeley (2005) and Theobald and Yallup (2005) who found that opening returns had a tendency towards overreaction which can be explained by Daniel et al. (1998). Moreover, Table 3 also shows that the price adjustment coefficient is 1.0000 for the second sub-period and thus suggests that open-to-open returns have a tendency towards intrinsic value in the post-extension period. Table 4 reports the results of overreaction for open-to-open futures returns. The price adjustment coefficient is 1.7451 in the pre-extension

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex

Futures Market and Stock Price Behavior • 413 Table 3. Estimation of overreaction for open-to-open stock returns for the two sub-periods.

Variable

Coefficient

Pre-Extension Period

Post-Extension Period

Constant OTOSRt−1 εt−1 Intercept ε2t−1 ht−1

α1 α2 α3 β1 β2 β3 g

−0.0000 −0.7528∗∗∗ −0.7262∗∗∗ 0.0000 0.1543∗∗ 0.7682∗∗∗ 1.7528

−0.0006 −0.6470 −0.5886 0.0001 0.0920∗∗ 0.7884∗∗∗ 1.0000

This table reports the overreaction for the open-to-open stock returns for the two sub-periods. The “pre-extension period” is from March 1, 1999 to December 30, 2000 and the “post-extension period” is from January 2, 2001 to December 31, 2002. OTOSRt is the open-to-open stock return on day t, εt is the residual on day t, ht is the conditional variance on day t, and g = 1 − α2 . ∗∗ Significant at the 5% level. ∗∗∗ Significant at the 1% level.

Table 4. Estimation of overreaction for open-to-open futures returns for the two sub-periods.

Variable

Coefficient

Pre-Extension Period

Post-Extension Period

Constant OTOFRt−1 εt−1 Intercept ε2t−1 ht−1

α1 α2 α3 β1 β2 β3 g

−0.0003 −0.7451∗∗∗ −0.6632∗∗∗ 0.0001 0.2066∗∗ 0.7102∗∗∗ 1.7451

−0.0004 −0.8245∗∗∗ −0.7682∗∗∗ 0.0000 0.0742∗∗∗ 0.8695∗∗∗ 1.8245

This table reports the overreaction for the open-to-open futures returns for the two sub-periods. The “pre-extension period” is from March 1, 1999 to December 30, 2000 and the “post-extension period” is from January 2, 2001 to December 31, 2002. OTOFRt is the open-to-open futures return on day t, εt is the residual on day t, ht is the conditional variance on day t, and g = 1 − α2 . ∗∗ Significant at the 5% level. ∗∗∗ Significant at the 1% level.

period and 1.8245 in the post-extension period. Hence, overreaction for opento-open futures returns exists in the two sub-periods. In contrast to Table 3, the price adjustment coefficient is larger for the post-extension period than the pre-extension period. These findings indicate that overreaction for opento-open futures returns is aggravated in the post-extension period.

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


As documented by Daniel et al. (1998), when informed traders are overconfident with respect to their private information, high volatility and autocorrelations can be observed. If informed traders shift their orders from stock market to the extended opening session of the futures market, the impact of informed traders on stock price will be reduced. Accordingly, return volatility, autocorrelations, and overreaction will also be reduced. The results of Tables 1 to 4 are consistent with the information asymmetry hypothesis, which is suggested by Foster and Viswanathan (1990), in that informed traders shift their orders from stock market to the extended opening session of the futures market. 6.3. Private information in the extended opening session of the futures market Table 5 presents the relationship between unexpected futures returns during the extended opening session and overnight stock returns. The result shows that the regression coefficient of α2 is 0.5371 and significant at the 1% level and thus suggests that the extended opening session of the futures market contains useful private information to predict subsequent overnight stock returns. This finding is consistent with the argument that informed traders shift their orders from stock market to the extended opening session. Table 5. Correlation between unexpected futures returns in the extended opening session and overnight returns of stock market. Variable

Coefficient

Constant UEFRIEOSt UEFRIECSt−1 S&Pt−1 Intercept ε2t−1 ht−1

α1 α2 α3 α4 β1 β2 β3

0.0019∗∗∗ 0.5371∗∗∗ 0.1949 0.5555∗∗∗ 0.0000∗∗∗ 0.2614∗∗∗ 0.1902

This table reports the impact of unexpected futures returns for the extended opening session on subsequent overnight stock returns. The sample period is from January 2, 2001 to December 31, 2002. ONSRt is the overnight stock return on day t, UEFREOSt is the unexpected futures return for the extended opening session on day t, UEFRECSt is the unexpected futures return for the extended closing session on day t, SPRt is the S&P 500 index return on day t, εt is the residual on day t, ht is the conditional variance on day t. ∗∗ Significant at the 5% level. ∗∗∗ Significant at the 1% level.

September 10, 2009

15:33

WSPC/155-RPBFMP

00168.tex


7. Conclusions This paper examines how the introduction of the extended opening session of the futures market affects stock price behavior around market opening. The TAIFEX extended the trading hours of its futures contracts by opening earlier 15 minutes than the TWSE on January 1, 2001. This institutional change presents a unique opportunity to examine how the extended opening session of the futures market might affect stock price behavior around market opening. Using data from the Taiwan Stock Exchange Capitalization Weighted Stock Index and the Taiwan Index Futures contracts traded on the TAIFEX, this paper compares return volatility, autocorrelations, and overreaction for open-to-open stock returns between the first sample period from March 1, 1999 to December 30, 2000, and the second sample period from January 2, 2001 to December 31, 2002. The empirical results show that return volatility and autocorrelations surrounding the stock market opening decline in the post-extension period. Moreover, overreaction for open-to-open stock returns is mitigated in the post-extension period. Finally, the unexpected futures return in the extended opening session of the futures market can predict subsequent overnight stock returns. These results indicate that the introduction of the extended opening session of the futures market has a significant impact on stock price behavior around market open, and thus suggest that informed traders shift their orders from stock market to the extended opening session of the futures market. Our empirical findings are consistent with the information asymmetry hypothesis suggested in Foster and Viswanathan (1990). Acknowledgments We would like to thank the editor, Professor Cheng-few Lee, and the anonymous referee(s) for helpful comments and suggestions. All errors remain our own. We are also grateful for the financial support from the National Science Council of Taiwan (NSC95-2416-H-011-009). References Amihud, Y and H Mendelson (1987). Trading mechanisms and stock returns: An empirical investigation. Journal of Finance, 42, 533–553. Barclay, MJ and JB Warner (1993). Stealth trading and volatility: Which trades move prices? Journal of Financial Economics, 34, 281–305. Chan, K, YP Chung and H Johnson (1995). The intraday behavior of bid-ask spreads for NYSE stocks and CBOE options. Journal of Financial and Quantitative Analysis, 30, 329–346.

September 10, 2009

15:33

WSPC/155-RPBFMP


Chan, YC (2005). Who trades in the stock index futures market when the underlying cash market is not trading? Pacific-Basin Finance Journal, 13, 547–561. Chelley-Steeley, P (2005). Explaining volatility and serial correlation in opening and closing returns: A study of the FT-30 components. Global Finance Journal, 16, 1–15. Cheng, LTW, L Jiang and RWY Ng (2004). Information content of extended trading for index futures. Journal of Futures Markets, 24, 861–886. Daniel, K, D Hirshleifer and A Subrahmanyam (1998). Investor psychology and security market under- and overreactions. Journal of Finance, 53, 1839–1885. Foster, FD and S Viswanathan (1990). A theory of the interday variations in volume, variance, and trading costs in securities markets. Review of Financial Studies, 3, 593–624. Foster, FD and S Viswanathan (1993). Variations in trading volume, return volatility, and trading costs: Evidence on recent price formation models. Journal of Finance, 48, 157–186. Hiraki, T, ED Maberly and N Takezawa (1995). The information content of endof-the-day index futures returns: International evidence from the Osaka Nikkei 255 futures contract. Journal of Banking and Finance, 19, 921–936. Ke, MC, CH Jiang and YS Huang (2004). The impact of tick size on intraday stock price behavior: Evidence from the Taiwan Stock Exchange. Pacific-Basin Finance Journal, 12, 19–39. Rhee, SG and CJ Wang (1997). The bid–ask bounce effect and the spread size effect: Evidence from the Taiwan stock market. Pacific-Basin Finance Journal, 5, 231–258. Ross, SA (1989). Information and volatility: The no-arbitrage martingale approach to timing and resolution irrelevancy. Journal of Finance, 44, 1–17. Theobald, M and P Yallup (2004). Determining security speed of adjustment coefficients. Journal of Financial Markets, 7, 75–96. Theobald, M and P Yallup (2005). Intradaily volatility and adjustment. Journal of International Financial Markets, Institutions and Money, 15, 407–424.

00168.tex