This paper analyzes how the daily opening and closing of financial markets affect trading volume. We model the desire to trade at the beginning and end of the day as a function of overnight return volatility. NYSE data from 1933-88 indicate that closing volume is positively related to expected overnight volatility, while volume at the open is positively related to both expected and unexpected volatility from the previous night. We interpret the symmetric response of trading at the open and the close to expected volatility as being due to investor heterogeneities in the ability to bear risk when the market is closed. This desire of investors to trade prior to market closings indicates a cost of mandating marketwide circuit breakers. A GENERAL RESULT FROM theoretical, experimental, and empirical science is that perturbations occur at structural boundaries. Financial markets are no exception to this regularity. As measured by a number of standards, such as trading volume, mean returns, and price volatility, financial markets are most active at the beginning and end of the trading session. Theory suggests that much of the trading activity at the open and the close is due to information. But can some of the surge in trading at the open and the close be attributed to the trading halt, per se, and be independent of any effect of contemporaneous information? In light of recent policy actions, obtaining an understanding of the source of the above-average trading activity around daily market openings and closings has taken on substantial importance. A number of stock and futures exchanges have instituted mechanisms for marketwide trading halts, commonly known as circuit breakers, in periods of above-average price movements. For example, a 250-point decline in the Dow Jones Industrial Average halts trading on the New York Stock Exchange (NYSE) for an hour.1 * Gerety is from Clemson University. Mulherin is from the Tuck School of Business, Dartmouth College. We thank an anonymous referee for extensive comments on two prior drafts. The paper has also benefitted from the comments of Transmission of volatility between stock markets, Review of Financial Studies 3, 5-33. Lockwood, Larry J. and Scott C. Linn, 1990, An examination of stock market return volatility during overnight and intraday periods, 1964-1989, Journal of Finance 45, 591-601. Ma, Christopher K., Richard L. Peterson, and Wenchi Kao, 1990, Evening trading and efficient information dispersal: The case of Treasury bond futures contracts, Working paper, Texas Tech University. Mclnish, Thomas H. and Robert A. Wood, 1988, An analysis of transactions data for the Toronto Stock Exchange, Working paper, University of Texas at Arlington. , 1992, An analysis of intraday patterns in bid/ask spreads for NYSE stocks, Journal of Finance 47, 753-764. McMillan, Hank, 1990, Circuit breakers in the S & P 500 futures market: Their effect on volatility and price discovery in October 1989, Working paper, U.S. Securities and Exchange Commission. Miller, Edward M., 1989, Explaining intra...
