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International price discovery in the presence of microstructure noise

Author

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

Abstract

This paper addresses and resolves the issue of microstructure noise when measuring the relative importance of home and U.S. market in the price discovery process of Canadian interlisted 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, due to the considerable amount of microstructure noise inherent in return data at very high frequencies, these estimators are distorted. We offer a modified approach that identifies unique information shares based on distributional assumptions and thereby enables us to control for microstructure noise. Our results indicate that the role of the U.S. market in the price discovery process of Canadian interlisted stocks has been underestimated so far. Moreover, we suggest that rather than stock specific factors, market characteristics determine information shares.

Suggested Citation

  • Grammig, Joachim G. & Peter, Franziska J., 2008. "International price discovery in the presence of microstructure noise," CFS Working Paper Series 2008/50, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:200850
    as

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    References listed on IDEAS

    as
    1. de Jong, Frank, 2002. "Measures of contributions to price discovery: a comparison," Journal of Financial Markets, Elsevier, vol. 5(3), pages 323-327, July.
    2. F. M. Bandi & J. R. Russell, 2008. "Microstructure Noise, Realized Variance, and Optimal Sampling," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(2), pages 339-369.
    3. Cheol S. Eun & Sanjiv Sabherwal, 2003. "Cross‐Border Listings and Price Discovery: Evidence from U.S.‐Listed Canadian Stocks," Journal of Finance, American Finance Association, vol. 58(2), pages 549-575, April.
    4. repec:bla:jfinan:v:58:y:2003:i:2:p:549-576 is not listed on IDEAS
    5. repec:bla:jfinan:v:59:y:2004:i:3:p:1235-1258 is not listed on IDEAS
    6. Baillie, Richard T. & Geoffrey Booth, G. & Tse, Yiuman & Zabotina, Tatyana, 2002. "Price discovery and common factor models," Journal of Financial Markets, Elsevier, vol. 5(3), pages 309-321, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    International Cross-Listings; Market Microstructure Noise; Price Discovery;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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