Interdaily volatility in a continuous order-driven market

Since Amihud and Mendelson (1987) documented a higher open-to-open return volatility compared to close-to-close return volatility in the US market, there has been no consensus on the reasons for it. Amihud and Mendelson suggest call auction opening (1987) and long halt of trade (1991) as possible reasons. Stoll and Whaley (1990) suggest the specialist system is the factor. Studies on various markets with different market structures give mixed testing results. Furthermore, the markets examined so far all have a call auction opening feature. The Hong Kong stock market is an order-driven dealership market that provides another dimension to examine the issue. If halt of trade is the major reason, open-to-open volatility in the Hong Kong market should still be higher. What we observe is counter to this: it is a bit lower than the close-to-close volatility. Positive autocorrelation of the open-to-open return series also suggests that there is no temporary price deviation at market open. We view all these as consistent with Stoll and Whaley's argument. 1999.