Opening Jump and Noise Trading

Abstract

ln this paper, we provide evidence that the opening stock price contains noise on an every day basis among all the NIFTY companies. However, we also find that the impact of noise does get eliminated from prices at the end of the trading day. We show h ow these seemingly contradictory twin empirical findings about the Indian stock market can be reconciled by proposing a Noise Trading Model in the framework of Kyle (1985). Given the clear importance of noise in opening prices, it becomes interesting to investigate whether or not we ca n come u p with a trading strategy that can make use of noise. The paper suggests a simple trading strategy for stock that contain noise. The strategy suggests that when the overnight return is positive, we need to short the stock a t the opening and buy it back at the closing. When overnight return is negative then simply buy at opening and sell at closing