Index Investing and Closing Auction : An Empirical Analysis of Closing Auction Turnover, Price Deviation and Price Reversal on the Oslo Stock Exchange

There are reasons to believe that there is increased popularity of trading in the closing auction due to the growth of index investing. We use intraday trading data from the Oslo Stock Exchange to examine and test the following hypotheses: (1) index investing drives closing auction turnover, and the turnover of stocks in the OSEBX and OBX Index is significantly higher during the closing auction relative to the remaining stocks on the Oslo Stock Exchange, and (2) prices deviate at the close and reverse overnight. Our results show that the turnover of stocks in the OSEBX and OBX are significantly higher than the remaining stocks during the closing auction. Further, prices do deviate at the close and reverse almost entirely overnight. Nevertheless, the use of the closing auction on the Oslo Stock Exchange might be more influenced by opening trends of the American stock market than index investing. To our knowledge, this is the first paper that analyzes the implications of the Oslo Stock Exchange closing auction on underlying stocks and conducts analyses to investigate whether index investing is related to the growth of trading during the closing auction.nhhma