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Related Securities, Allocation of Attention and Price Discovery: Evidence from NYSE-Listed Non-U.S. Stocks

Author

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  • Piotr Korczak
  • Kate Phylaktis

    ()

Abstract

In this paper we explore how the composition of a market maker's portfolio and allocation of attention across securities in the portfolio affect pricing. We analyze whether more attention devoted to similar securities enables a market maker to extract information relevant to a stock from order flow to related securities and consequently whether it leads to improved price discovery of the stock. We base on the recent literature on allocation of attention in share trading (Corwin and Coughenour, 2008; Boulatov et al., 2009) and define the prominence of a security as the proportion of its dollar volume in the total volume of the specialist portfolio it belongs to. Our empirical tests are focused on New York Stock Exchange specialists and the U.S. share in price discovery of 64 British and French companies cross-listed on the NYSE. We define related securities as stocks from the same country, the same region or other foreign stocks. We find strong evidence that an increase in the prominence of related stocks in the specialist portfolio leads to a higher U.S. share in price discovery of our sample stocks. We interpret our findings as evidence that concentrating market makers in similar stocks reduces information asymmetries and improves the information environment. To support our argument, we show that an increase in the prominence of other foreign stocks in the specialist portfolio significantly reduces the adverse selection component of the bid-ask spread.

Suggested Citation

  • Piotr Korczak & Kate Phylaktis, 2009. "Related Securities, Allocation of Attention and Price Discovery: Evidence from NYSE-Listed Non-U.S. Stocks," Bristol Economics Discussion Papers 09/612, Department of Economics, University of Bristol, UK.
  • Handle: RePEc:bri:uobdis:09/612
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    References listed on IDEAS

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    1. Gagnon, Louis & Andrew Karolyi, G., 2010. "Multi-market trading and arbitrage," Journal of Financial Economics, Elsevier, vol. 97(1), pages 53-80, July.
    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. 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.
    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. Ian Domowitz & Jack Glen & Ananth Madhavan, 1998. "International Cross-Listing and Order Flow Migration: Evidence from an Emerging Market," Journal of Finance, American Finance Association, vol. 53(6), pages 2001-2027, December.
    6. Menkveld, Albert J. & Koopman, Siem Jan & Lucas, Andre, 2007. "Modeling Around-the-Clock Price Discovery for Cross-Listed Stocks Using State Space Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 213-225, April.
    7. 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.
    8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    9. Halling, Michael & Pagano, Marco & Randl, Otto & Zechner, Josef, 2005. "Where is the Market? Evidence from Cross-Listings," CEPR Discussion Papers 4987, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    NYSE specialists; cross-listing; related stocks; price discovery;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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