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Improving information leadership share for measuring price discovery

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  • Shen, Shulin
  • Zhang, Yixuan
  • Zivot, Eric

Abstract

We propose an improvement to the information leadership (IL) measure of price discovery of Yan and Zivot (2010), and the information leadership share (ILS) measure of Putniņš (2013). Our improved PIL and PILS measures integrate the price discovery share (PDS) of Shen et al. (2024) with the component share (CS) measure. Our improved PIL measure accurately reflects the ratio of initial responses of competing markets to a permanent shock in the presence of correlated reduced-form vector error correction model residuals, thereby substantially generalizing the IL measure for practical applications. Simulation evidence strongly supports the superiority of our improved PIL measure over a wide spectrum of existing price discovery metrics (Lien and Shrestha, 2009; Putniņš, 2013; Sultan and Zivot, 2015; Patel et al., 2020). We demonstrate the effectiveness of our improved measure by examining price discovery for various Chinese stocks cross-listed in Shanghai and Hong Kong (SH-HK) both before and after the initiation of the Shanghai-Hong Kong Stock Connect.

Suggested Citation

  • Shen, Shulin & Zhang, Yixuan & Zivot, Eric, 2025. "Improving information leadership share for measuring price discovery," Journal of Empirical Finance, Elsevier, vol. 83(C).
    • Handle: RePEc:eee:empfin:v:83:y:2025:i:c:s092753982500060x
    DOI: 10.1016/j.jempfin.2025.101638
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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