Price discovery in international equity trading
This study addresses two questions: where does price discovery occur for internationally-traded firms and how do international stock prices adjust to an exchange rate shock ? These questions are answered by analyzing quotes originating in New York and Frankfurt for three large German firms, DaimlerChrysler, Deutsche Telekom, and SAP, during overlapping trading hours. A high-frequency sample of quotes from both locations along with the dollar/euro exchange rate yields evidence of one cointegrating relation among the three variables. Vector error correction models are estimated for each firm and the associated vector moving average representations are utilized to infer the share of price discovery coming from the exchange rate, New York, and Frankfurt quotes. The evidence suggests a structure of the international equity market that has the home-market largely determining the random walk component of the international value of a firm along with an independent role for exchange rate shocks to affect prices in the U.S. markets. However, there is a significant information share for New York in the case of DaimlerChrysler and an even bigger role for New York with respect to SAP. Following a shock to the exchange rate, we find that almost all of the adjustment comes through the New York price.
|Date of creation:||00 Jun 2001|
|Date of revision:|
|Contact details of provider:|| Postal: Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium)|
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- 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.
- Kim, Minho & Szakmary, Andrew C. & Mathur, Ike, 2000. "Price transmission dynamics between ADRs and their underlying foreign securities," Journal of Banking & Finance, Elsevier, vol. 24(8), pages 1359-1382, August.
- Chen, Song Xi, 1999. "Beta kernel estimators for density functions," Computational Statistics & Data Analysis, Elsevier, vol. 31(2), pages 131-145, August.
- Swanson, N.R. & Granger, C.W.J., 1994. "Impulse Response Functions Based on Causal Approach to Residual Orthogonalization in Vector Autoregressions," Papers 9-94-1, Pennsylvania State - Department of Economics.
- Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
- Li, Hongyi & Maddala, G. S., 1997.
"Bootstrapping cointegrating regressions,"
Journal of Econometrics,
Elsevier, vol. 80(2), pages 297-318, October.
- Tom Doan, . "RATS program to demonstrate bootstrapping with cointegration," Statistical Software Components RTZ00021, Boston College Department of Economics.
When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2001028. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS)
If references are entirely missing, you can add them using this form.