IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v59y2015icp457-468.html
   My bibliography  Save this article

The determinants of price discovery: Evidence from US-Canadian cross-listed shares

Author

Listed:
  • Frijns, Bart
  • Gilbert, Aaron
  • Tourani-Rad, Alireza

Abstract

We examine the determinants of price discovery for Canadian firms cross-listed on the main US stock exchanges over the period 1996–2011. Sampling at a one-minute frequency, we compute Gonzalo and Granger Component Shares (CS) and employ a system GMM approach to control for persistence in price discovery and endogeneity between CS and its determinants. We find that price discovery is highly persistent and that there is strong evidence of simultaneity between CS and its determinants. We conclude that lower relative spreads and higher relative trading activity increase an exchange’s contribution to price discovery. We also document that it is small trades that drive price discovery, particularly since the introduction of decimalization.

Suggested Citation

  • Frijns, Bart & Gilbert, Aaron & Tourani-Rad, Alireza, 2015. "The determinants of price discovery: Evidence from US-Canadian cross-listed shares," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 457-468.
    • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:457-468
    DOI: 10.1016/j.jbankfin.2015.07.011
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426615002095
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2015.07.011?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    2. 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.
    3. Agarwal, Sumit & Liu, Chunlin & Rhee, S. Ghon, 2007. "Where does price discovery occur for stocks traded in multiple markets? Evidence from Hong Kong and London," Journal of International Money and Finance, Elsevier, vol. 26(1), pages 46-63, February.
    4. Chakravarty, Sugato & Panchapagesan, Venkatesh & Wood, Robert A., 2005. "Did decimalization hurt institutional investors?," Journal of Financial Markets, Elsevier, vol. 8(4), pages 400-420, November.
    5. Hoechle, Daniel & Schmid, Markus & Walter, Ingo & Yermack, David, 2012. "How much of the diversification discount can be explained by poor corporate governance?," Journal of Financial Economics, Elsevier, vol. 103(1), pages 41-60.
    6. Pascual, Roberto & Pascual-Fuster, Bartolome & Climent, Francisco, 2006. "Cross-listing, price discovery and the informativeness of the trading process," Journal of Financial Markets, Elsevier, vol. 9(2), pages 144-161, May.
    7. Easley, David & Hvidkjaer, Soeren & O’Hara, Maureen, 2010. "Factoring Information into Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 293-309, April.
    8. 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.
    9. K.C. Chen & Guangzhong Li & Lifan Wu, 2010. "Price Discovery for Segmented US-Listed Chinese Stocks: Location or Market Quality?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 242-269.
    10. Putniņš, Tālis J., 2013. "What do price discovery metrics really measure?," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 68-83.
    11. 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.
    12. Yan, Bingcheng & Zivot, Eric, 2010. "A structural analysis of price discovery measures," Journal of Financial Markets, Elsevier, vol. 13(1), pages 1-19, February.
    13. Aslan, Hadiye & Easley, David & Hvidkjaer, Soeren & O'Hara, Maureen, 2011. "The characteristics of informed trading: Implications for asset pricing," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 782-801.
    14. Kadapakkam, Palani-Rajan & Misra, Lalatendu & Tse, Yiuman, 2003. "International Price Discovery for Emerging Market Stocks: Evidence from Indian GDRs," Review of Quantitative Finance and Accounting, Springer, vol. 21(2), pages 179-199, September.
    15. 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.
    16. Cheol S. Eun & Sanjiv Sabherwal, 2003. "Cross‐Border Listings and Price Discovery: Evidence from U.S.‐Listed Canadian Stocks," Journal of Finance, American Finance Association, vol. 58(2), pages 549-575, April.
    17. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April.
    18. Chen, Haiqiang & Choi, Paul Moon Sub, 2012. "Does information vault Niagara Falls? Cross-listed trading in New York and Toronto," Journal of Empirical Finance, Elsevier, vol. 19(2), pages 175-199.
    19. Alhaj-Yaseen, Yaseen S. & Lam, Eddery & Barkoulas, John T., 2014. "Price discovery for cross-listed firms with foreign IPOs," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 80-87.
    20. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    21. Su, Qian & Chong, Terence Tai-Leung, 2007. "Determining the contributions to price discovery for Chinese cross-listed stocks," Pacific-Basin Finance Journal, Elsevier, vol. 15(2), pages 140-153, April.
    22. repec:uts:ppaper:2013:2 is not listed on IDEAS
    23. Frijns, Bart & Gilbert, Aaron & Tourani-Rad, Alireza, 2010. "The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 498-508, March.
    24. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    25. Hupperets, Erik C. J. & Menkveld, Albert J., 2002. "Intraday analysis of market integration: Dutch blue chips traded in Amsterdam and New York," Journal of Financial Markets, Elsevier, vol. 5(1), pages 57-82, January.
    26. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    27. repec:bla:jfinan:v:58:y:2003:i:2:p:549-576 is not listed on IDEAS
    28. 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(4), pages 563-579, December.
    29. von Furstenberg, George M. & Tabora, Carlos B., 2004. "Bolsa or NYSE: price discovery for Mexican shares," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(4), pages 295-311, October.
    30. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    31. Hasbrouck, Joel, 1995. "One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-1199, September.
    32. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
    33. K.C. Chen & Guangzhong Li & Lifan Wu, 2010. "Price Discovery for Segmented US‐Listed Chinese Stocks: Location or Market Quality?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1‐2), pages 242-269, January.
    34. Frijns, Bart & Indriawan, Ivan & Tourani-Rad, Alireza, 2015. "Macroeconomic news announcements and price discovery: Evidence from Canadian–U.S. cross-listed firms," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 35-48.
    35. Lieberman, Offer & Ben-Zion, Uri & Hauser, Shmuel, 1999. "A characterization of the price behavior of international dual stocks: an error correction approach," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 289-304, February.
    36. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July.
    37. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    38. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sarveshwar Kumar Inani, 2018. "Price Discovery and Efficiency of Indian Agricultural Commodity Futures Market: An Empirical Investigation," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 129-154, March.
    2. Shrestha, Keshab & Philip, Sheena & Peranginangin, Yessy, 2020. "Contributions of Crude Oil Exchange Traded Funds in Price Discovery Process," American Business Review, Pompea College of Business, University of New Haven, vol. 23(2), pages 393-407, November.
    3. Frijns, Bart & Indriawan, Ivan & Tourani-Rad, Alireza, 2018. "The interactions between price discovery, liquidity and algorithmic trading for U.S.-Canadian cross-listed shares," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 136-152.
    4. Rui Fan & Oleksandr Talavera & Vu Tran, 2023. "Social media and price discovery: The case of cross‐listed firms," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 151-167, February.
    5. Poutré, Cédric & Dionne, Georges & Yergeau, Gabriel, 2024. "The profitability of lead–lag arbitrage at high frequency," International Journal of Forecasting, Elsevier, vol. 40(3), pages 1002-1021.
    6. Alex Frino & Ognjen Kovačević & Vito Mollica & Robert I. Webb, 2020. "The sensitivity of trading to the cost of information," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1631-1644, October.
    7. Frijns, Bart & Zwinkels, Remco C.J., 2018. "Time-varying arbitrage and dynamic price discovery," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 485-502.
    8. Corbet, Shaen & Hou, Yang & Hu, Yang & Oxley, Les, 2020. "The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry," International Review of Financial Analysis, Elsevier, vol. 72(C).
    9. Sarveshwar Kumar Inani, 2017. "Price discovery in Indian stock index futures market: new evidence based on intraday data," International Journal of Indian Culture and Business Management, Inderscience Enterprises Ltd, vol. 14(1), pages 23-43.
    10. Papavassiliou, Vassilios G. & Kinateder, Harald, 2021. "Information shares and market quality before and during the European sovereign debt crisis," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    11. Xu, Ke & Chen, Yu-Lun & Yang, J. Jimmy, 2023. "Market uncertainty, persistent arbitrage-free violation, and price discovery in RMB market," International Review of Financial Analysis, Elsevier, vol. 90(C).
    12. Yu‐Lun Chen & J. Jimmy Yang, 2024. "Time‐varying price discovery in regular and microbitcoin futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(1), pages 103-121, January.
    13. Donald Lien & Pi-Hsia Hung, 2023. "Whose trades contribute more to price discovery? Evidence from the Taiwan stock exchange," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 213-263, July.
    14. Cepoi, Cosmin-Octavian & Anghel, Dan-Gabriel & Pop, Ionuţ Daniel, 2021. "Asymmetries and flight-to-safety effects in the price discovery process of cross-listed stocks," Economic Modelling, Elsevier, vol. 98(C), pages 302-318.
    15. Caihong Xu & Dong Zhang, 2019. "Market openness and market quality in gold markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 384-401, March.
    16. Xingguo Luo & Xiaoli Yu & Shihua Qin & Qi Xu, 2020. "Option trading and the cross‐listed stock returns: Evidence from Chinese A–H shares," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1665-1690, November.
    17. Edward Curran & Jack Hunt & Vito Mollica, 2020. "Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1793-1806, November.
    18. Cosmin Octavian Cepoi & Victor Dragotă & Ruxandra Trifan & Andreea Iordache, 2023. "Probability of informed trading during the COVID-19 pandemic: the case of the Romanian stock market," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-27, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cepoi, Cosmin-Octavian & Anghel, Dan-Gabriel & Pop, Ionuţ Daniel, 2021. "Asymmetries and flight-to-safety effects in the price discovery process of cross-listed stocks," Economic Modelling, Elsevier, vol. 98(C), pages 302-318.
    2. Qadan, Mahmoud, 2018. "Switches in price discovery: Are U.S. traders more qualified in making valuations?," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 221-234.
    3. Corbet, Shaen & Hou, Yang & Hu, Yang & Oxley, Les, 2020. "The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry," International Review of Financial Analysis, Elsevier, vol. 72(C).
    4. Ghadhab, Imen & Hellara, Slaheddine, 2016. "Price discovery of cross-listed firms," International Review of Financial Analysis, Elsevier, vol. 44(C), pages 177-188.
    5. Su, Qian & Chong, Terence Tai-Leung, 2007. "Determining the contributions to price discovery for Chinese cross-listed stocks," Pacific-Basin Finance Journal, Elsevier, vol. 15(2), pages 140-153, April.
    6. Donald Lien & Zijun Wang, 2019. "Quantile information share," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(1), pages 38-55, January.
    7. Frijns, Bart & Gilbert, Aaron & Tourani-Rad, Alireza, 2010. "The dynamics of price discovery for cross-listed shares: Evidence from Australia and New Zealand," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 498-508, March.
    8. Ibikunle, Gbenga, 2018. "Trading places: Price leadership and the competition for order flow," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 178-200.
    9. Alma Hales, 2015. "Liquidity and price discovery in Latin America: evidence from American depositary receipts," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(4), pages 661-678, October.
    10. Alhaj-Yaseen, Yaseen S. & Lam, Eddery & Barkoulas, John T., 2014. "Price discovery for cross-listed firms with foreign IPOs," International Review of Financial Analysis, Elsevier, vol. 31(C), pages 80-87.
    11. Oliver Entrop & Bart Frijns & Marco Seruset, 2020. "The determinants of price discovery on bitcoin markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 816-837, May.
    12. Frijns, Bart & Indriawan, Ivan & Tourani-Rad, Alireza, 2015. "Macroeconomic news announcements and price discovery: Evidence from Canadian–U.S. cross-listed firms," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 35-48.
    13. Korczak, Piotr & Phylaktis, Kate, 2010. "Related securities and price discovery: Evidence from NYSE-listed Non-U.S. stocks," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 566-584, September.
    14. Shrestha, Keshab & Philip, Sheena & Peranginangin, Yessy, 2020. "Contributions of Crude Oil Exchange Traded Funds in Price Discovery Process," American Business Review, Pompea College of Business, University of New Haven, vol. 23(2), pages 393-407, November.
    15. Wang, Jianxin & Yang, Minxian, 2011. "Housewives of Tokyo versus the gnomes of Zurich: Measuring price discovery in sequential markets," Journal of Financial Markets, Elsevier, vol. 14(1), pages 82-108, February.
    16. Lockwood, Jimmy & Lockwood, Larry & Miao, Hong & Ramchander, Sanjay & Yang, Dongxiao, 2022. "The information content of ETF options," Global Finance Journal, Elsevier, vol. 53(C).
    17. Lei Wu & Kuan Xu & Qingbin Meng, 2021. "Information flow and price discovery dynamics," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 329-367, January.
    18. Chen, Haiqiang & Choi, Paul Moon Sub & Hong, Yongmiao, 2013. "How smooth is price discovery? Evidence from cross-listed stock trading," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 668-699.
    19. Pascual, Roberto & Pascual-Fuster, Bartolome & Climent, Francisco, 2006. "Cross-listing, price discovery and the informativeness of the trading process," Journal of Financial Markets, Elsevier, vol. 9(2), pages 144-161, May.
    20. Frijns, Bart & Indriawan, Ivan & Tourani-Rad, Alireza, 2018. "The interactions between price discovery, liquidity and algorithmic trading for U.S.-Canadian cross-listed shares," International Review of Financial Analysis, Elsevier, vol. 56(C), pages 136-152.

    More about this item

    Keywords

    Price discovery; Determinants; Market microstructure; United States; Canada;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:457-468. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.