How Smooth Is Price Discovery? Evidence from Cross-listed Stock Trading
Haiqiang Chen, Paul Moon Sub Choi, Yongmiao Hong
Journal of International Money and Finance
#002160 20131014 (published) Views:141
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 privateinformation, market friction and liquidity measures, firm-level characteristics, and aggregate risks.
JEL-Codes: C32; G15; G14
Keywords: Price discovery; Information share; Threshold error correction model; Smooth transition error correction model