Modeling Round-the-Clock Price Discovery for Cross-Listed Stocks Using State Space Methods

Download or read book Modeling Round-the-Clock Price Discovery for Cross-Listed Stocks Using State Space Methods written by Albert J. Menkveld and published by . This book was released on 2012 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. market and, potentially, in both markets simultaneously. We develop a general methodology based on a state space model to study 24-hour price discovery in a multiple markets setting. As opposed to the standard variance ratio approach, this model deals naturally with (i) simultaneous quotes in an overlap, (ii) missing observations in a non-overlap, (iii) noise due to transitory microstructure effects, and (iv) contemporaneous correlation in returns due to market-wide factors. We apply our model to Dutch stocks, cross-listed in the U.S. Our findings suggest a minor role for the NYSE in price discovery for Dutch shares, in spite of its non-trivial and growing market share.