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Journal of Economics and Finance

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28-06-2021

Anatomy of intraday volatility at the Chilean stock exchange

Authors: A. Can Inci, Andres Ramirez, Hakan Saraoglu

Published in: Journal of Economics and Finance | Issue 1/2022

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Abstract

This is the first study, to our best knowledge, that investigates the intraday volatility characteristics of the Santiago Stock Exchange. The Chilean Stock market has grown consistently over the last 40 years and is now the second largest equity market in South America behind that of Brazil. Using a recently available dataset for the most actively traded stocks, we examine the patterns of intraday volatility. We show that intraday volatility declines during the day with an accentuation at the end of trading for the stocks we examine. We document the necessity of an opening auction system for the market and justify the benefits of the proactive implementation of a closing call auction system by exchange regulators in February 2019. Showing evidence that periods of efficiency alternate with periods with lack thereof, we provide suggestions as to when different types of traders should participate during the trading session.

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It should be noted that we use intraday volatility rather than volatility over longer periods of time as our focus in this study is to evaluate the quality of the price discovery process during daily trading activity whereby lower intraday volatility can be used as an indicator.

We base our use of the term “fair” for the behavior of intraday volatility on the following definition by the U.S. Securities Exchange Commission (SEC) regarding the role of a specialist: “A specialist is a person who is a member of a stock exchange, such as the New York Stock Exchange, whose role is to facilitate trading in certain stocks. Specialists must make a market in the stock they trade by displaying their best bid and ask prices to the market during trading hours. They also are required to maintain a “fair and orderly market” in the stocks they trade. They do this by stepping in with their own capital to help reduce market volatility when there are not sufficient buyers or sellers.” (https://www.sec.gov/fast-answers/answersspecialisthtm.html).

Also, New York Stock Exchange (NYSE) Rule 104.(a) on the “Dealings and Responsibilities of Designated Market Makers (DMMs)” states: “DMMs registered in one or more securities traded on the Exchange must engage in a course of dealings for their own account to assist in the maintenance of a fair and orderly market insofar as reasonably practicable. (https://nyseguide.srorules.com/rules/document).

We planned to also investigate the intraday IPSA index, the Santiago Stock Exchange index composed of the top 30 stocks. But this data set was not available to purchase from the Chilean Stock Market.

Market presence is defined by the Santiago Stock Exchange as the number of days in which transactions of over UF1,000 (about USD 40,000) are recorded during the previous 180 trading days.

Visual representations using 5-min segments are very similar and are available upon request.

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Title: Anatomy of intraday volatility at the Chilean stock exchange
Authors: A. Can Inci
Andres Ramirez
Hakan Saraoglu
Publication date: 28-06-2021
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 1/2022
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-021-09556-6

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