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A Bias in Closing Prices: The Case of the When-Issued Pricing Anomaly

Published online by Cambridge University Press:  06 April 2009

Raymond M. Brooks  and
Shur-Nuaan Chiou
Raymond M. Brooks
Affiliation:
Department of Finance, University of Missouri, 214 Middlebush Hall, Columbia, MO 65211
Shur-Nuaan Chiou
Affiliation:
Department of Finance, National Chung Cheng University, Ming-Hsiung, Chia-Yi, Taiwan, R.O.C. 621
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Abstract

Financial studies examining stock price behavior have principally relied on end-of-day data. This paper illustrates a bias in closing prices by reexamining the when-issue pricing anomaly with intraday data. With intraday data, major portions of the pricing anomaly can be explained by: a nonsynchronous matching of trades; a difference in the settlement procedures (labeled time value of money in Choi and Strong (1983)); a mismatching of market purchases with market sales (first proposed by Lamoureux and Wansley (1989)); and a higher frequency of market purchases relative to market sales. In addition, the small remaining portion of the anomaly cannot be arbitraged. The remaining premium is attributed to a lower level of limit order competition and an order imbalance in the when-issued shares.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 3 , September 1995 , pp. 441 - 454
Copyright
Copyright © School of Business Administration, University of Washington 1995

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