Are pre-opening periods important? Evidence from Chinese market lunch breaks

Abstract

The Chinese stock market design offers a unique opportunity to examine the impact of pre-open call auctions on price efficiency and price discovery. By comparison, we find that opening prices of morning sessions, as determined by call auctions, are more efficient and informative than prices of the afternoon session, as determined by a continuous auction mechanism. Using corporate announcements to compare the speed of price adjustments in response to overnight information versus lunch break information, we find that prices react much more rapidly to overnight announcements, consistent with pre-open call auctions facilitating price discovery to announcements. Results also suggest that corporate announcements enhance stock liquidity with the effect of overnight announcements on liquidity being stronger than the effects of lunch break announcements. Overall, our evidence highlights the utility of pre-open call auctions.