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The Relative Contemporaneous Information Response. A New Cointegration-Based Measure of Price Discovery

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  • Helder Sebastião

    ()
    (Faculty of Economics University of Coimbra and GEMF)

Abstract

This paper describes the cointegration-based technologies commonly used to assess the relative price discovery across markets, namely the Hasbrouck information shares and Gonzalo-Granger long memory common factor weights, and presents a new metric denominated contemporaneous information response. These metrics are compared via simulation experiments. It is shown that, under fairly regular market conditions, the contemporaneous information response is a reliable measure of the relative incorporation of information, and in most cases is more resilient to microstructural noise than the other two metrics.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2012-04.

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Length: 50 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:gmf:wpaper:2012-04

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Keywords: Price discovery; High frequency data; Information shares; Common factors; FTSE 100; Stock index futures; Market microstructure.;

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  1. deB. Harris, Frederick H. & McInish, Thomas H. & Wood, Robert A., 2002. "Security price adjustment across exchanges: an investigation of common factor components for Dow stocks," Journal of Financial Markets, Elsevier, vol. 5(3), pages 277-308, July.
  2. Frank de Jong, 2001. "Measures of Contributions to Price Discovery: A Comparison," Tinbergen Institute Discussion Papers 01-114/2, Tinbergen Institute.
  3. 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.
  4. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(1), pages 27-35, January.
  5. Gonzalo, J. & Ng, S., 1996. "A Systematic Framework for Analyzing the Dynamic Effects of Permanent and Transitory Shocks," Cahiers de recherche 9603, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  6. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
  7. Erik Theissen, 2001. "Price Discovery in Floor and Screen Trading Systems," Bonn Econ Discussion Papers bgse35_2001, University of Bonn, Germany.
  8. Chowdhry, Bhagwan & Nanda, Vikram, 1991. "Multimarket Trading and Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 483-511.
  9. Kurov, Alexander & Lasser, Dennis J., 2004. "Price Dynamics in the Regular and E-Mini Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 365-384, June.
  10. Joel Hasbrouck, 2003. "Intraday Price Formation in U.S. Equity Index Markets," Journal of Finance, American Finance Association, vol. 58(6), pages 2375-2400, December.
  11. Blanchard, Olivier Jean & Quah, Danny, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Reply," American Economic Review, American Economic Association, vol. 83(3), pages 653-58, June.
  12. Easley, David & O'Hara, Maureen, 1992. " Time and the Process of Security Price Adjustment," Journal of Finance, American Finance Association, vol. 47(2), pages 576-605, June.
  13. Lehmann, Bruce N., 2002. "Some desiderata for the measurement of price discovery across markets," Journal of Financial Markets, Elsevier, vol. 5(3), pages 259-276, July.
  14. Theobald, Michael & Yallup, Peter, 2004. "Determining security speed of adjustment coefficients," Journal of Financial Markets, Elsevier, vol. 7(1), pages 75-96, January.
  15. Hasbrouck, Joel, 2002. "Stalking the "efficient price" in market microstructure specifications: an overview," Journal of Financial Markets, Elsevier, vol. 5(3), pages 329-339, July.
  16. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
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