Time overlaps of the Russian Stock exchange with foreign stock exchanges and their effect on liquidity: Evidence from the natural experiment

<p>Liquidity of the Russian stock market is in many ways determined through its dependence on major foreign stock exchanges, primarily European and the US ones. This dependence occurs via two main channels: large portion of non-residents in trading volumes of Russian stocks and information flows coming from overseas markets (including price information for cross-listed stocks). However, starting from February 2011 when regular summer-winter time switching was stopped in Russia our market lost one hour of joint trades with European and the US markets, which is reflected in its liquidity in the next winter periods.</p><p style="margin-left:-9.0pt;">In this paper we investigated the consequences of the natural experiment described above: how daylight time saving cancellation had an impact on Russian stock market performance in terms of trading activity and liquidity. We chose three basic liquidity measures that could be useful in our research: natural logarithm of stock turnovers as a direct measure of trading activity comparable across stocks, high-low spread estimator as a proxy for transaction costs, and Amihud ratio to investigate market depth changes. In addition to these measures, we divided our study of the time shifts in two groups &ndash; for the overlap with Europe and overlap with the USA, implying different hours to be investigated: 11:00 am for the former, 17:00 for the latter. Finally, we provided calculations on the whole data period versus narrowed sample including one month before/after regular time switches.</p><p style="margin-left:-9.0pt;">To achieve our goals, we, first of all, explored intraday patterns of different liquidity measures before and after summer time cancellation as well as derived &ldquo;normal&rdquo; behavior models for each stock to use in event studies. Secondly, we provided SUR estimation with the use of dummy of the effect from summer time cancellation for all 12 cases above. Additional control variables used: expected liquidity, positive/negative returns, volatility forecasts. Thirdly, we discussed how the effect of summer time cancellation differs across stocks. Finally, we provided the same SUR estimation for ADR/GDR&rsquo;s on Russian stocks traded in European markets, taking log-turnovers and high-low spreads into consideration.</p>