Housewives of Tokyo versus the Gnomes of Zurich: Measuring Price Discovery in Sequential Markets

Abstract

This paper examines market-specific contributions to price discovery in sequential markets, where changes in the efficient price are embedded in the sequential price changes across markets defined by time zones. We propose a structural VAR model to identify market-specific shocks to the efficient price and to measure a market's contribution to price discovery. The model is applied to the 24-hour trading of AUD, JPY, EUR, and GBP against USD over an eight-year sample period. We estimate the information shares, in the sense of Hasbrouck (1995), of four sequential markets around the world. We find that Europe remains highly significant for the pricing of all four exchange rates. Asia is gaining information shares in EUR and GBP but is losing information shares in AUD and JPY. Currency trading is still dominated by institutional investors in Europe and the United States. The price impact of the "housewives of Tokyo" may have been overstated.

Keywords: price discovery, information share, sequential markets, Beverage-Nelson decomposition, efficient price, variance ratio, foreign exchange rate

JEL Classification: G14, G15, C32