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Unformatted text preview: Surprise! Its Illiquid: The January 2006 Tokyo Stock Exchange Shutdown Roni Israelov November 29, 2006 Abstract On January 18, 2006, the Tokyo Stock Exchange (TSE) unexpectedly closed twenty minutes early. Forty minutes earlier, investors were informed that the number of transactions on that day had reached the daily capacity of the exchanges computer systems. Further, the exchange disclosed that upgrading its technology would take six to twelve months, that the exchange would shut down automatically on any day in which the daily capacity had been reached, and that the exchange would close half an hour early each day in the near future to reduce the risk of an unanticipated shutdown. I estimate that over the six month period following the January 18 event, the expected number of additional market closures is 1.5 and the probability of at least one additional shutdown is 70 percent. I investigate the impact of the systematic liquidity event on relative valuations over the cross-section of stocks listed on the TSE. Stocks that only trade on the TSE lost a statistically significant 2 percent of their value relative to those that trade on the TSE and at least one additional Japanese exchange. Also, liquid stocks lost value relative to illiquid stocks. For instance, high turnover stocks lost approximately 6 percent of their value relative to low turnover stocks and liquid stocks, as measured by the Amihud (2002) illiquidity measure, lost approximately 4 percent of their value relative to illiquid stocks. The results provide further evidence that investors place an economically significant value on liquid- ity. JEL classification: G0; G1; G12. Keywords: Liquidity; Market Closure; Liquidity premium; Transaction costs; Tokyo Stock Ex- change. Tepper School of Business, Carnegie Mellon University 5000 Forbes Avenue, Pittsburgh, PA 15213, USA Email: firstname.lastname@example.org Phone: (412) 606-2796 I am grateful to Burton Hollifield, Lubo s Pastor, and Duane Seppi for comments and suggestions. 1 Introduction On January 18, 2006, the Tokyo Stock Exchange (TSE) unexpectedly closed twenty minutes early. Forty minutes earlier, investors were informed that the number of transactions on that day, approx- imately 4.5 million, had reached the exchanges transaction processing system capacity. Further, the exchange disclosed that increased capacity through technology upgrades could take six to twelve months, that the exchange would shut down automatically if and when the daily capacity had been reached, and that the exchange would close half an hour early each day in the near future to reduce the risk of another unanticipated shutdown. The event provides a unique opportunity to learn about the value investors place on liquidity. The market shutdown was not simply a single passing disruption to the system. The unexpected market closure, coupled with the information disclosed by the exchange during and after the event, likely led investors to update their beliefs about their...
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