Home Bias and Market Liquidity

Abstract:     
In this paper, we examine the difference in liquidity between NYSE-listed U.S. and non-U.S. stocks. We construct a size-matched U.S. stock and a volume-matched U.S. stock for each non-U.S. stock and compare the Kyle's and spread between non-U.S. stocks and their U.S. matches. Our empirical results show that the average Kyle's and the average bid-ask spread of non-U.S. stocks are significantly larger than those of size-matched U.S. stocks. When non-U.S. stocks are compared with volume-matched U.S. stocks, the difference of spread width remains significant, although the magnitude of difference decreases. In contrast, the Kyle's difference between non-U.S. stocks and volume-matched U.S. stocks virtually disappears. Overall, our work suggests that the trading costs of non-U.S. stocks are significantly higher than those of size-matched U.S. stocks. They are also higher than the trading costs of volume-matched U.S. stocks, but the significance of the comparison result is tempered. The high trading costs of non-U.S. stocks may help explain why U.S. investors prefer holding domestic portfolios.

Keywords: ADR stock, liquidity, spread

JEL Classifications: G19

Working Paper Series