Measuring the Effectiveness of Volatility Call Auctions

We propose a method based on synthetic portfolios for event studies and apply it in the context of market microstructure. The method provides a robust data driven approach to build a credible counterfactual. The method is used to evaluate the effectiveness of a volatility call auction using intra day data from the Colombian stock Exchange. With the counterfactual and the observed price after the auction we can analyze if the auction enhances market quality. Results indicate that the synthetic portfolio method provides an accurate approach to build a credible counterfactual that approximates the behavior of the asset if the auction had not taken place. The main results indicate that the volatility call auction does provide a way to reduce the volatility of the asset but their effect on other market quality variables, liquidity and trading activity is ambiguous at best.

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