TY - JOUR
T1 - How smooth is price discovery? Evidence from cross-listed stock trading
AU - Chen, Haiqiang
AU - Choi, Paul Moon Sub
AU - Hong, Yongmiao
N1 - Funding Information:
Chen appreciates the financial support from the Ministry of Education Key Laboratory of Econometrics and the Fujian Provincial Key Laboratory of Statistical Sciences at Xiamen University. Choi is grateful for the Ewha Womens University research grant, and Kwanjeong Educational Foundation grants 03112BUS044 and 0422USD012. Special thanks are due to Warren B. Bailey, G. Andrew Karolyi, Maureen O'Hara. We would also like to thank Jinho Byun, Michael Chng, Joung Hwa Choi, Cheol Eun, Willoe Freeman, Stefan Frey, Jinho Kim, Yihui Lan, Gianluca Mattrocci, Lars Norden, Alexei Orlov, Kyung-Hee Park, Jung Soon Shin, Jungwon Suh, Yafeng Qin, Byung Sam Yoo and the participants of INFINITI 2010 (Dublin, Ireland), Asian Finance Association 2010 (Hong Kong), Securities and Financial Markets 2011 (Kaohsiung, Taiwan), Australian Finance and Banking Conference 2011 (Sydney, Australia), European Financial Management Association 2012 (Barcelona, Spain), World Finance Conference 2012 (Rio de Janeiro, Brazil), and American Economic Association 2013 (San Diego, California) for invaluable discussion and feedback. This paper previously circulated under the title: “Price discovery and threshold cointegration: Theory and empirics on cross-border stock trading.” Standard disclaimer rules apply and all errors are our own. Standard disclaimer rules apply and all errors are our own.
PY - 2013
Y1 - 2013
N2 - The adjustment to parity can be nonlinear for a cross-listed pair: Convergence may be quicker when the price deviation is sufficiently profitable. We propose a threshold error correction model (ECM) to gauge the market-respective information shares of Canadian listings traded on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). Since dynamics may alternatively be gradual, we further generalize the threshold framework to a smooth transition ECM. The empirical implications are as follows: First, the TSX and the NYSE appear to have integrated over time. Second, parity-convergence accelerates upon discounts on the cross-listings on the NYSE. Third, we find a larger feedback from the NYSE if the price gap exceeds the threshold (required arbitrage return). Fourth, informed traders tend to cluster on the NYSE upon discounts on the cross-listings. Fifth, information share and threshold are affected by the relative degree of private information, market friction and liquidity measures, firm-level characteristics, and aggregate risks.
AB - The adjustment to parity can be nonlinear for a cross-listed pair: Convergence may be quicker when the price deviation is sufficiently profitable. We propose a threshold error correction model (ECM) to gauge the market-respective information shares of Canadian listings traded on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). Since dynamics may alternatively be gradual, we further generalize the threshold framework to a smooth transition ECM. The empirical implications are as follows: First, the TSX and the NYSE appear to have integrated over time. Second, parity-convergence accelerates upon discounts on the cross-listings on the NYSE. Third, we find a larger feedback from the NYSE if the price gap exceeds the threshold (required arbitrage return). Fourth, informed traders tend to cluster on the NYSE upon discounts on the cross-listings. Fifth, information share and threshold are affected by the relative degree of private information, market friction and liquidity measures, firm-level characteristics, and aggregate risks.
KW - Information share
KW - Price discovery
KW - Smooth transition error correction model
KW - Threshold error correction model
UR - http://www.scopus.com/inward/record.url?scp=84874788178&partnerID=8YFLogxK
U2 - 10.1016/j.jimonfin.2012.06.005
DO - 10.1016/j.jimonfin.2012.06.005
M3 - Article
AN - SCOPUS:84874788178
SN - 0261-5606
VL - 32
SP - 668
EP - 699
JO - Journal of International Money and Finance
JF - Journal of International Money and Finance
IS - 1
ER -