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Information flows and the law of one price

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  • Fan, Rui
  • Talavera, Oleksandr
  • Tran, Vu

Abstract

This paper explores the role of information flows for the law of one price in an almost frictionless environment. Specifically, we examine whether the volume and content of social media messages are related to the exchange rate pass-through (ERPT) to prices of dual-listed stocks. Our sample includes 37 million tweets mentioning the name of a stock cross-listed in the United Kingdom (UK) and the United States (US) from 2015 to 2018. Using a high-frequency intraday data sample, we observe a negative (positive) link between the ERPT and volume (agreement) of tweets. The findings suggest that large information flows and a high degree of disagreement add extra frictions for the law of one price. In addition, there is an asymmetric pattern of the pass-through, notwithstanding that there are no import/export or geographically-related frictions. This presents further evidence of the importance of information flows in understanding the law of one price.

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  • Fan, Rui & Talavera, Oleksandr & Tran, Vu, 2023. "Information flows and the law of one price," International Review of Financial Analysis, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:finana:v:85:y:2023:i:c:s1057521922004161
    DOI: 10.1016/j.irfa.2022.102466
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    More about this item

    Keywords

    Twitter; Investor sentiment; Exchange rate pass-through; Dual-listing; Market integration; Text classification; Computational linguistics;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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