The Effects of Overnight Events on Daytime Return: A Market Microstructure Analysis of Market Quality

Abstract

This paper examines the trading and non-trading returns to diagnose the impact of market microstructure changes on market quality. The daily data of ten agricultural commodities traded on the National Commodity and Derivative Exchange (NCDEX) were used for the study. The data has been divided into three categories: year-wise, pre- and post-reform, pre-ban, and post-ban period. The study employs variance ratio analysis, and the results suggest high daytime and opening variances. A first-order autocorrelation detects the return predictability in the data series. A Value at Risk (VaR) and Expected Shortfall (ES) methods were employed to get more detail about the downside risk of the series. It suggested that daytime return has more risk compared to overnight return. Overall, this study suggests that market microstructure effects are visible in the Indian agricultural commodity market and hardly observe any improvement in the market quality. Since we reveal the impact of policy changes on market quality, the results will be useful for policymakers. © The Author(s), under exclusive licence to Springer Japan KK, part of Springer Nature 2023.