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The Dynamics of Price Discovery

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  • Bingcheng Yan
  • Eric Zivot

Abstract

In this paper we propose a new approach for the econometric analysis of the dynamics of price discovery using a structural cointegration model for the price changes in arbitrage linked markets. Our methodology characterizes the dynamics of price discovery based on the impulse response functions from an identified structural cointegration model, and we measure the efficiency of a market’s price discovery by the absolute magnitude of cumulative pricing errors in the price discovery process. We apply our methodology to investigate the extent to which the US dollar contributes to the price discovery of the yen/euro exchange rate. Our results show that substantial price discovery of JPY/EUR occurs through the dollar, and that the efficiency of the dollar’s price discovery is positively related to the relative liquidity of the dollar markets versus the cross rate market.

Suggested Citation

  • Bingcheng Yan & Eric Zivot, 2007. "The Dynamics of Price Discovery," Working Papers UWEC-2005-01-R, University of Washington, Department of Economics, revised Mar 2007.
    • Handle: RePEc:udb:wpaper:uwec-2005-01-r
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    File URL: http://faculty.washington.edu/ezivot/research/structuralanalysispricediscovery20041018.pdf
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    Cited by:

    1. Óscar Arce & Sergio Mayordomo & Juan Ignacio Peña, 2012. "Credit-valuation in the sovereing CDS and bonds markets: Evidence from the euro area crisis," CNMV Working Papers CNMV Working Papers no. 5, CNMV- Spanish Securities Markets Commission - Research and Statistics Department.
    2. Figuerola-Ferretti, Isabel & Gonzalo, Jesús, 2010. "Modelling and measuring price discovery in commodity markets," Journal of Econometrics, Elsevier, vol. 158(1), pages 95-107, September.
    3. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Price discovery and trade fragmentation in a multi-market environment: Evidence from the MTS system," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 227-240.
    4. Arce, Oscar & Mayordomo, Sergio & Peña, Juan Ignacio, 2013. "Credit-risk valuation in the sovereign CDS and bonds markets: Evidence from the euro area crisis," Journal of International Money and Finance, Elsevier, vol. 35(C), pages 124-145.
    5. Edson Kambeu, 2017. "The role of Exchange Traded Funds in the price discovery process of stocks listed on the Botswana Stock Exchange," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 6(1), pages 141-148, January.
    6. Joseph P. Janzen & Michael K. Adjemian, 2017. "Estimating the Location of World Wheat Price Discovery," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 99(5), pages 1188-1207.
    7. Santos, Francisco Luna & Garcia, Márcio Gomes Pinto & Medeiros, Marcelo Cunha, 2015. "Price Discovery in Brazilian FX Markets," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 35(1), October.
    8. Wang, Jianxin & Yang, Minxian, 2011. "Housewives of Tokyo versus the gnomes of Zurich: Measuring price discovery in sequential markets," Journal of Financial Markets, Elsevier, vol. 14(1), pages 82-108, February.
    9. Kao, Chung-Wei & Wan, Jer-Yuh, 2012. "Price discount, inventories and the distortion of WTI benchmark," Energy Economics, Elsevier, vol. 34(1), pages 117-124.
    10. Michael Aitken & Niall Almeida & Frederick H. deB. Harris & Thomas H. McInish, 2008. "Financial analysts and price discovery," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 1-24, March.
    11. Narjiss Araba & Alain François-Heude, 2019. "Price discovery and volatility spillovers in the French wheat market," Post-Print hal-03088859, HAL.
    12. Osama Ahmed, 2021. "Assessing the Current Situation of the World Wheat Market Leadership: Using the Semi-Parametric Approach," Mathematics, MDPI, vol. 9(2), pages 1-21, January.
    13. Otsubo, Yoichi, 2014. "International cross-listing and price discovery under trading concentration in the domestic market: Evidence from Japanese shares," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 36-51.
    14. Cristina M. Scherrer, 2014. "Cross listing: price discovery dynamics and exchange rate effects," CREATES Research Papers 2014-53, Department of Economics and Business Economics, Aarhus University.
    15. Ahmed, Osama, 2021. "Assessing the current situation of the world wheat market leadership: Using the semi-parametric approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 9(2).
    16. Mala Dutt & Sanjay Sehgal, 2018. "Domestic and International Information Linkages between Gold Spot and Futures Markets: An Empirical Study for India," Metamorphosis: A Journal of Management Research, , vol. 17(1), pages 1-17, June.

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