Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices
AbstractThe spot price on the Taiwan stock index is richer in information than the futures price judged by the price discovery measures of Gonzalo and Granger [Gonzalo, J., & Granger, C.W.J. (1995). Estimation of common long-memory components in cointegrated systems. Journal of Business and Economic Statistics, 13, 27-35.] and Hasbrouck [Hasbrouck, J. (1995). One security, many markets: Determining the contributions to price discovery. Journal of Finance, 50, 1175-1199.]. What is special about the markets is that both the spot and futures error-correction coefficients are positive, implying a digressive convergence to their long-run equilibrium in the error-correction (EC) process. Innovation accounting suggests that the cause of this digressive equilibrium adjustment is that investors systematically overreact to news in the less informative futures market but under-react to the more informative spot market. Our contribution is in identifying the digressive convergence implied by same-sign EC coefficients, comparing it to the normal convergence widely found in opposite-sign EC models, and providing short-run mispricing interpretations for both types of convergence to equilibrium.
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Bibliographic InfoArticle provided by Elsevier in its journal Review of Financial Economics.
Volume (Year): 18 (2009)
Issue (Month): 4 (October)
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Web page: http://www.elsevier.com/locate/inca/620170
Price discovery Overreaction Error correction;
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