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)
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

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