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Price discovery in floor and screen trading systems

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  • Theissen, Erik

Abstract

We analyze price discovery in floor-based and electronic exchanges using data from the German stock market. We find that both markets contribute to price discovery. There is bidirectional Granger causality, and prices from both markets adjust to deviations from the long-run equilibrium. We use two different measures of the contributions to price discovery, the information share (Hasbrouck 1995) and the weights with which the series enter the common long memory component as defined by Gonzalo / Granger (1995). The contributions of the two trading systems to the process of price discovery are almost equal when transaction prices are used for the estimation. Models based on quote midpoints indicate that the electronic trading system has a larger share in the price discovery process. A cross-sectional analysis reveals that the contributions to price discovery are positively related to the market shares of the trading systems.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 9 (2002)
Issue (Month): 4 (November)
Pages: 455-474

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Handle: RePEc:eee:empfin:v:9:y:2002:i:4:p:455-474

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References

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  1. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  2. Stucki, Thomas & Wasserfallen, Walter, 1994. "Stock and option markets: the Swiss evidence," Journal of Banking & Finance, Elsevier, vol. 18(5), pages 881-893, October.
  3. THEISSEN, Erik, 1999. "Floor versus Screen Trading : Evidence from the German Stock Market," Les Cahiers de Recherche 690, HEC Paris.
  4. Thorsten Freihube & Erik Theissen, 2001. "An Index Is An Index Is An Index?," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 53(4), pages 295-320, October.
  5. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
  6. Francis Breedon & Allison Holland, 1998. "Electronic versus open outcry markets: The case of the Bund futures contract," Bank of England working papers 76, Bank of England.
  7. Paul Kofman & James T. Moser, 1995. "Spreads, information flows and transparency across trading systems," Working Paper Series, Issues in Financial Regulation 95-1, Federal Reserve Bank of Chicago.
  8. Martens, Martin, 1998. "Price discovery in high and low volatility periods: open outcry versus electronic trading," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 243-260, December.
  9. deB. Harris, Frederick H. & McInish, Thomas H. & Shoesmith, Gary L. & Wood, Robert A., 1995. "Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(04), pages 563-579, December.
  10. Grunbichler Andreas & Longstaff Francis A. & Schwartz Eduardo S., 1994. "Electronic Screen Trading and the Transmission of Information: An Empirical Examination," Journal of Financial Intermediation, Elsevier, vol. 3(2), pages 166-187, March.
  11. Kempf, Alexander & Korn, Olaf, 1998. "Trading System and Market Integration," Journal of Financial Intermediation, Elsevier, vol. 7(3), pages 220-239, July.
  12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  13. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  14. Ding, David K. & Harris, Frederick H. deB. & Lau, Sie Ting & McInish, Thomas H., 1999. "An investigation of price discovery in informationally-linked markets: equity trading in Malaysia and Singapore," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 317-329, November.
  15. Hasbrouck, Joel, 1995. " One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-99, September.
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Citations

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Cited by:
  1. Gaul, Jürgen & Theissen, Erik, 2012. "A partially linear approach to modelling the dynamics of spot and futures prices," CFR Working Papers 13-01, University of Cologne, Centre for Financial Research (CFR).
  2. Erik Theissen, 2012. "Price discovery in spot and futures markets: a reconsideration," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 969-987, November.
  3. Grammig, Joachim & Melvin, Michael & Schlag, Christian, 2005. "Internationally cross-listed stock prices during overlapping trading hours: price discovery and exchange rate effects," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 139-164, January.
  4. Bingcheng Yan & Eric Zivot, 2007. "A Structural Analysis of Price Discovery Measures," Working Papers UWEC-2006-08-FC, University of Washington, Department of Economics, revised Apr 2007.
  5. Tswei, Keshin & Lai, Jing-yi, 2009. "Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices," Review of Financial Economics, Elsevier, vol. 18(4), pages 183-189, October.
  6. Yan, Bingcheng & Zivot, Eric, 2010. "A structural analysis of price discovery measures," Journal of Financial Markets, Elsevier, vol. 13(1), pages 1-19, February.
  7. Pantisa Pavabutr & Piyamas Chaihetphon, 2010. "Price discovery in the Indian gold futures market," Journal of Economics and Finance, Springer, vol. 34(4), pages 455-467, October.
  8. Fricke, Christoph & Menkhoff, Lukas, 2011. "Does the "Bund" dominate price discovery in Euro bond futures? Examining information shares," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1057-1072, May.
  9. Helder Sebastião, 2008. "The partial adjustment factors of FTSE 100 stock index and stock index futures: The informational impact of electronic trading systems," GEMF Working Papers 2008-07, GEMF - Faculdade de Economia, Universidade de Coimbra.
  10. Martinez, Valeria & Gupta, Paramita & Tse, Yiuman & Kittiakarasakun, Jullavut, 2011. "Electronic versus open outcry trading in agricultural commodities futures markets," Review of Financial Economics, Elsevier, vol. 20(1), pages 28-36, January.
  11. Rittler, Daniel, 2009. "Price Discovery, Causality and Volatility Spillovers in European Union Allowances Phase II: A High Frequency Analysis," Working Papers 0492, University of Heidelberg, Department of Economics.
  12. Rittler, Daniel, 2012. "Price discovery and volatility spillovers in the European Union emissions trading scheme: A high-frequency analysis," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 774-785.
  13. Helder Sebastião, 2012. "The Relative Contemporaneous Information Response. A New Cointegration-Based Measure of Price Discovery," GEMF Working Papers 2012-04, GEMF - Faculdade de Economia, Universidade de Coimbra.
  14. Dirk Schiereck & Christian Voigt, 2010. "With or without you: market quality of floor trading when screen trading closes early," Review of Quantitative Finance and Accounting, Springer, vol. 34(2), pages 179-197, February.
  15. Yang Hou & Steven Li, 2013. "Price Discovery in Chinese Stock Index Futures Market: New Evidence Based on Intraday Data," Asia-Pacific Financial Markets, Springer, vol. 20(1), pages 49-70, March.
  16. repec:onb:oenbwp:y::i:111:b:1 is not listed on IDEAS
  17. Yiuman Tse & Paramita Bandyopadhyay, 2006. "Multi-market trading in the Eurodollar futures market," Review of Quantitative Finance and Accounting, Springer, vol. 26(3), pages 321-341, May.
  18. Wang, Yun-Yi & Chang, Chiung-Chiao & Lee, Wan-Chen, 2013. "Price discovery between regular and mini index futures in the Taiwan Futures Exchange," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 224-237.

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