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Modelling Round-the-Clock Price Discovery for Cross-Listed Stocks using State Space Methods

Authors: Menkveld, Albert J.
Koopman, Siem Jan
Lucas, André
Keywords: Efficient price;;Financial markets;High-frequency data;Kalman filter;Unobserved components time series models
Issue Date: 25-Jul-2004
Series/Report no.: SC-CFE-04-03
Abstract: 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 provide an application of our model to Dutch-U.S. stocks. 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. The results differ significantly from the variance ratio approach.
Appears in Collections:Financial Econometrics

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