Is the Extension of Trading Hours Always Beneficial? An Artificial Agent-Based Analysis

Abstract

The extension of trading hours to provide more trading opportunities and improve price efficiency has increasingly been discussed. However, currently, there is limited trading activity during the stock market’s extended-hours trading session. Thus, we should examine whether the extension of trading hours is still effective for creating more trading opportunity and price efficiency even if there are few market participants during the extended session. For this study, we build an agent-based market model based on that of Brock and Hommes (1998) and analyze the effect of extending trading hours. We find that although extending trading hours could increase daily trading volume, it could distort price formation and trade opportunity if market participants are limited during the extended-hours session. Specifically, the extension could result in more concentrated trading in the opening session, wider divergence between market prices and the fundamental value of stocks, and higher return volatility (especially at the open).