It Takes Two to Tango: International Transfer of Pricing Information between Cross-Listed Securities

Abstract

In this paper we study the dynamics of the pricing information transfer between American Depositary Receipts (ADRs) of Japanese firms listed on the US markets and their underlying shares traded on the Tokyo Stock Exchange (TSE). We estimate a bivariate VEC-GARCH model with skewed-t innovations (Hansen, (1994)). Our main findings are as follows. First, and consistent with other related studies, we find that at the return level the TSE emerges as the dominant market, while the US markets behave as the satellite ones. Interestingly, an error correction mechanism exhibits non-linear dynamics consistent with cross-border trading of the investors facing different (implicit) transaction costs. Secondly, we find significant volatility spill-overs between the two markets. However, in contrast to the return dynamics, we find no evidence of asymmetry in the volatility spill-overs. Thirdly, we find some preliminary evidence of cross-market skewness dynamics. Finally, we study the role of trading volume in the cross-market transmission of pricing information by the means of parametric and nonparametric tests. For both the US and Tokyo stock markets we find strong empirical evidence of the trading volume affecting the error-correction dynamics. Curiously, the impact of the TSE trading volume is transmitted to the subsequent trading day on the US stock markets, while the impact of the US trading volume appears to have have no impact anymore at the opening of Tokyo stock exchange, an asymmetry which supports the idea of trading volume providing additional information to the investors.

Keywords: cross-listed securities, price discovery, trading volume

JEL Classification: G12, G15