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Price Discovery in Auction Markets: A Look Inside the Black Box

Ananth Madhavan1,2; Venkatesh Panchapagesan3

1 University of Southern California · 2 California Southern University · 3 Washington University in St. Louis

Review of Financial Studies 2000

Opening mechanisms play a crucial role in information aggregation following the overnight nontrading period. This article examines the process of price discovery at the New York Stock Exchange single-price opening auction. We develop a theoretical model to explain the determinants of the opening price and test the model using order-level data. We show that the presence of designated dealers facilitates price discovery relative to a fully automated call auction market. This is consistent with specialists extracting information from observing the evolution of the limit order book. In addition, the specialist's opening trade reflects noninformational factors such as price stabilization requirements.

DOI
10.1093/rfs/13.3.627
Volume
13 (3)
Pages
627-658
Language
en
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BibTeX
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