The Equity Market and Its Price Discovery Risk : An Empirical Study for the CAC40 Stock Market Index

This paper studies the price discovery dynamics in an order-driven market. Based on the transaction data on individual stocks, the paper focuses on the study of the monthly evolution of normalized volatility ratios on Euronext Paris for the CAC40 stocks before and after the implementation of the Markets in Financial Instruments Directive (MiFID). Since 2007, this European directive ended the national rule of order concentration and increased the fragmentation among trading venues. The normalized volatility ratio is used as a measure of the market quality from the point of view of price discovery. A significant inefficient price determination is observed at the opening period of the market before and after the implementation of MiFID, unlike the closing period. This finding is attributable to the complexity of price discovery following a period of non-trading and relatively heavy information releases. The opening half-hour percentage of High Frequency buyers, the opening half-hour number of trades and the monthly average number of transactions are significant explanatory variables of the volatility accentuation at the opening in the post-MiFID context. The market quality could be improved at the opening half-hour for the CAC40 stock Index on Euronext Paris