In a dynamic model of large traders who manage inventory risk, we show that a daily market closure coordinates liquidity. This coordination of liquidity can improve allocative efficiency relative to 24/7 trade, fully offsetting the costs of the closure. Some length of closure is always better than 24/7 trade. A long closure is optimal in small markets with infrequent shocks, while large markets would benefit from extending trading hours to near 24/7. Our results are robust to allowing for heterogeneous information about the fundamental value of the asset. Our findings speak to proposals to modify trading hours.
regulatory disclosure dynamic investment price impact Market Closures allocative efficiency price impact