How Well Does the Weighted Price Contribution Measure Price Discovery?

32 Pages Posted: 20 May 2010 Last revised: 10 Dec 2014

See all articles by Jian-Xin Wang

Jian-Xin Wang

University of Technology Sydney; Financial Research Network (FIRN)

Minxian Yang

UNSW Australia Business School, School of Economics

Date Written: December 10, 2014

Abstract

The weighted price contribution (WPC) is a popular measure for price discovery. This paper examines the theoretical properties and empirical performance of the WPC. The benchmark measure for the WPC is the information share (IS) based on the variation of the efficient price. We derive the asymptotic value of the WPC under the assumption of normality. We show that the WPC converges to the IS only when the returns follow independent normal distributions with zero mean. Our theoretical predictions based on normality for WPC hold well in the empirical analyses of the overnight price discovery for the S&P 100 index and its constituent stocks. As the correlation between overnight and daytime returns increases, the deviation between the WPC and the IS becomes large.

Keywords: price discovery, weighted price contribution, information share, information flow, efficient price, overnight return, daytime return, the S&P 100 index

JEL Classification: G14, G15, C32

Suggested Citation

Wang, Jian-Xin and Yang, Minxian, How Well Does the Weighted Price Contribution Measure Price Discovery? (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=1611451 or http://dx.doi.org/10.2139/ssrn.1611451

Jian-Xin Wang (Contact Author)

University of Technology Sydney ( email )

UTS Business School
Finance Decipline
Sydney, NSW
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Minxian Yang

UNSW Australia Business School, School of Economics ( email )

School of Economics
The University of New South Wales
Sydney, NSW NSW 2052
Australia
93853353 (Phone)

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