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Price discovery in international equity trading

Author

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  • 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," LIDAM Discussion Papers CORE 2001028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2001028
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    Cited by:

    1. Kees G. Koedijk & Mathijs A. Van Dijk, 2004. "The Cost of Capital of Cross‐listed Firms," European Financial Management, European Financial Management Association, vol. 10(3), pages 465-486, September.
    2. 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.
    3. Kate Phylaktis & Gikas Manalis, 2005. "Price transmission dynamics between informationally linked securities," Applied Financial Economics, Taylor & Francis Journals, vol. 15(3), pages 187-201.
    4. Lee, Chien-Chiang & Chen, Mei-Ping & Chang, Chi-Hung, 2014. "Industry co-movement and cross-listing: Do home country factors matter?," Japan and the World Economy, Elsevier, vol. 32(C), pages 96-110.
    5. 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.
    6. Albert J. Menkveld & Siem Jan Koopman & André Lucas, 2003. "Round-the-Clock Price Discovery for Cross-Listed Stocks: US-Dutch Evidence," Tinbergen Institute Discussion Papers 03-037/2, Tinbergen Institute, revised 13 Oct 2003.
    7. K.C. Chen & Guangzhong Li & Lifan Wu, 2010. "Price Discovery for Segmented US-Listed Chinese Stocks: Location or Market Quality?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 242-269.
    8. Karolyi, G. Andrew, 2003. "DaimlerChrysler AG, the first truly global share," Journal of Corporate Finance, Elsevier, vol. 9(4), pages 409-430, September.
    9. 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.
    10. Ben Sita, Bernard & Abdallah, Wissam, 2014. "Volatility links between the home and the host market for U.K. dual-listed stocks on U.S. markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 183-199.
    11. Jokivuolle, Esa & Lanne, Markku, 2004. "Trading Nokia: the roles of the Helsinki vs the New York stock exchanges," Bank of Finland Research Discussion Papers 26/2004, Bank of Finland.
    12. Kaltenhäuser, Bernd, 2001. "Explaining the Dollar-Euro rate: Do stock market returns mater?," CFS Working Paper Series 2001/06, Center for Financial Studies (CFS).
    13. Theissen, Erik, 2003. "Organized equity markets in Germany," CFS Working Paper Series 2003/17, Center for Financial Studies (CFS).
    14. Wang, Xue & Yao, Lee J. & Fang, Victor, 2013. "Stock prices and the location of trade: Evidence from China-backed ADRs," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 677-688.
    15. Jaiswal-Dale, Ameeta & Jithendranathan, Thadavillil, 2009. "Transmission of shocks from cross-listed markets to the return and volatility of domestic stocks," Journal of Multinational Financial Management, Elsevier, vol. 19(5), pages 395-408, December.

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    More about this item

    Keywords

    international finance; price discovery; high frequency data;
    All these keywords.

    JEL classification:

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

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