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Information flows and the law of one price

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  • Rui Fan

    (Swansea University)

  • Oleksandr Talavera

    (University of Birmingham)

  • Vu Tran

    (University of Reading)

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 to prices of dual-listed stocks. Our sample includes 37 million Twitter messages mentioning the name of a UK-US cross-listed stock from 2015 to 2018. Using a high-frequency intraday data sample, we observe a negative (positive) link of volume (agreement). 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 for the importance of information flows in understanding the law of one price.

Suggested Citation

  • Rui Fan & Oleksandr Talavera & Vu Tran, 2022. "Information flows and the law of one price," Discussion Papers 22-05, Department of Economics, University of Birmingham.
    • Handle: RePEc:bir:birmec:22-05
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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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