IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2001028.html
   My bibliography  Save this paper

Price discovery in international equity trading

Author

Listed:
  • GRAMMIG, Joachim
  • MELVIN, Michael
  • SCHLAG, Christian

Abstract

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.

Suggested Citation

  • GRAMMIG, Joachim & MELVIN, Michael & SCHLAG, Christian, 2001. "Price discovery in international equity trading," CORE Discussion Papers 2001028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2001028
    as

    Download full text from publisher

    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-2001.html
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
    4. 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.
    5. Chen, Song Xi, 1999. "Beta kernel estimators for density functions," Computational Statistics & Data Analysis, Elsevier, vol. 31(2), pages 131-145, August.
    6. 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.
    7. Li, Hongyi & Maddala, G. S., 1997. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 80(2), pages 297-318, October.
    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. 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.
    2. Kate Phylaktis & Gikas Manalis, 2005. "Price transmission dynamics between informationally linked securities," Applied Financial Economics, Taylor & Francis Journals, vol. 15(3), pages 187-201.
    3. Chan, Justin S.P. & Hong, Dong & Subrahmanyam, Marti G., 2008. "A tale of two prices: Liquidity and asset prices in multiple markets," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 947-960, June.
    4. Karolyi, G. Andrew, 2003. "DaimlerChrysler AG, the first truly global share," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 409-430, September.
    5. Liu, Qingfu & An, Yunbi, 2011. "Information transmission in informationally linked markets: Evidence from US and Chinese commodity futures markets," Journal of International Money and Finance, Elsevier, vol. 30(5), pages 778-795, September.

    More about this item

    Keywords

    international finance; price discovery; high frequency data;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    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: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). General contact details of provider: http://edirc.repec.org/data/coreebe.html .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.