Is the Extension of Trading Hours Always Beneficial? An Artificial Agent-Based Analysis
- 162 Downloads
The extension of trading hours to provide more trading opportunities and improve price efficiency has increasingly been discussed. However, currently, stock market trading activity during the extended-hours session is quite limited. Thus, we should examine whether the extension of trading hours is effective in creating more trading opportunities and increasing price efficiency even if there are only a few market participants during the extended session. For this study, we build an agent-based market model and analyze the effect of extending trading hours. We find that although the extension of trading hours could increase daily trading volume, price formation and trading activity could be distorted if the number of market participants during the extended-hours session is limited. Specifically, the extension could result in more concentrated trading at the open of the regular trading session, greater divergence between market prices and the fundamental value of assets, as well as higher return volatility (especially at the open).
KeywordsExtended trading hours Agent-based market model Price efficiency Return volatility Trading volume
Publication of this paper was supported by a grant-in-aid from Zengin Foundation for Studies on Economics and Finance, and Grant-in-Aid for Scientific Research (A) (No.16H01725) from the Japan Society for the Promotion of Science. The opinions expressed in this paper solely represent the views of the authors and do not reflect the opinions of the organizations to which the authors belong.
- Cont, R., Potters, M., & Bouchaud, J. P. (1997). Scaling in stock market data: Stable laws and beyond. In B. Dubrulle, F. Groner, & D. Sornette (Eds.), Scale Invariance and Beyond. Berlin: Springer.Google Scholar
- Easlay, D., & O’Hara, M. (1992). Time and the process of security price adjustment. Journal of Finance, 47, 576–605.Google Scholar
- Mandelbrot, B. (1963). The variation of certain speculative prices. Journal of Business, 36, 392–417.Google Scholar
- Osaki, S. (2014). TSE looking at extending cash trading hour again. NRI Financial Research Paper “lakyara”, 78.Google Scholar