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International price discovery in the presence of market microstructure effects

  • Grammig, Joachim G.
  • Peter, Franziska J.

This paper addresses and resolves the problems caused by microstructure effects when measuring the relative importance of home and U.S. market in the price discovery process of internationally cross listed stocks. In order to avoid large bounds for information shares, previous studies applying the Cholesky decomposition within the Hasbrouck (1995) framework had to rely on high frequency data. However, this entails a potential bias of estimated information shares induced by microstructure effects. We propose a modified approach that relies on distributional assumptions and yields unique and unbiased information shares. Our results indicate that the role of the U.S. market in the price discovery process of Canadian interlisted stocks has been severely underestimated to date. Moreover, we find that rather than stock specific factors, market design determines information shares.

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Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 08-10.

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Date of creation: 2008
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Handle: RePEc:zbw:cfrwps:0810
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  16. de Jong, Frank, 2002. "Measures of contributions to price discovery: a comparison," Journal of Financial Markets, Elsevier, vol. 5(3), pages 323-327, July.
  17. Lehmann, Bruce N., 2002. "Some desiderata for the measurement of price discovery across markets," Journal of Financial Markets, Elsevier, vol. 5(3), pages 259-276, July.
  18. Chen, Song Xi, 1999. "Beta kernel estimators for density functions," Computational Statistics & Data Analysis, Elsevier, vol. 31(2), pages 131-145, August.
  19. Cécile Carpentier & Jean-François L'Her & Jean-Marc Suret, 2007. "Competition and Survival of Stock Exchanges: Lessons From Canada," CIRANO Working Papers 2007s-26, CIRANO.
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