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Price discovery at the beginning of a trading day: an error correction model for the Indian capital market

The paper examines the nature and the extent of structural changes in the process of price discovery at the beginning of a trading session in the Indian capital market. Invoking cointegration of the opening and previous trading day's closing values of the market indices, it attempts to explain the daily open-to-open returns at the Indian capital market under an error correction framework, with the daily close to open returns being interpreted as ‘errors’ in the equilibrium relationship. Empirical examination of daily data on BSE 100 index from 2 January 1991 to 15 November, 2000 reveals the presence of at least three stages in the structural relationship which could typically be associated with: (i) closed and inefficient; (ii) closed and efficient; and (iii) open and efficient stage of development of the Indian capital market. Empirical evidences suggest that currently the Indian capital market is in the transitional phase between (ii) and (iii).