Price Impact in Closing Auctions, Opening Auctions, and Continuous Markets: A Benchmark for Cost of Trading on Anomalies

Amit Goyal, Narasimhan Jegadeesh, and Yanbin Wu

♦ The closing auction crosses about 10% of daily trades and serves as a potentially attractive alternative to trading in the continuous market. We estimate the price impact for order execution in the closing auction, continuous market, and opening auction, and find that it is the smallest in the closing auction. We compute the execution cost for anomalies-based trading strategies in all three trading avenues. The annual trading costs for low turnover strategies based on financial ratios such as profitability and investments range from 2 to 15 basis points (bps) in the closing auction.

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