What is Special about the Opening? Evidence from NASDAQ

Abstract

This paper reports that prices of NASDAQ stocks are more volatile around the market

opening than closing. Evidence fiom individual stocks indicates that there is a systematic

relationship between the excess opening volatility and trading activity. Much of the excess

opening volatility is related to two factors, bid-ask bounce and price formation. For inactively

traded stocks, bid-ask bounce contributes almost all of the transitory volatility as opposed to

20?! of the transitory volatility for actively traded stocks. On the other hand, price formation

is the primary source of the difference between the opening and closing variances for actively

traded stocks. We also find price formation occurs in the absence of trading as quotes

updated prior to the 9:30 AM. start of trading reflect new information.