Welcome to the new version of CaltechAUTHORS. Login is currently restricted to library staff. If you notice any issues, please email coda@library.caltech.edu
Published September 1986 | public
Journal Article

Stock return variances: The arrival of information and the reaction of traders

Abstract

Asset prices are much more volatile during exchange trading hours than during non-trading hours. This paper considers three explanations for this phenomenon: (1) volatility is caused by public information which is more likely to arrive during normal business hours; (2) volatility is caused by private information which affects prices when informed investors trade; and (3) volatility is caused by pricing errors that occur during trading. Although a significant fraction of the daily variance is caused by mispricing, the behavior of returns around exchange holidays suggests that private information is the principle factor behind high trading-time variances.

Additional Information

© 1986 Published by Elsevier B.V. This paper has benefited from the comments of seminar participants at Boston College, the University of British Columbia, the University of Chicago, Dartmouth College, Harvard University, Northwestern University, Purdue University and Stanford University. We are also grateful to Craig Ansley, Merton Miller, Steven Ross, Robert Stambaugh, William Schwert, Jerold Warner (the referee), and especially, Douglas Diamond and Eugene Fama for comments on an earlier draft.

Additional details

Created:
August 19, 2023
Modified:
October 20, 2023