One Security, Four Markets: Canada-US Cross-Listed Options and Underlying Equities

39 Pages Posted: 30 Nov 2010

See all articles by Michal Czerwonko

Michal Czerwonko

McGill University

Nabil Khoury

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG)

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business

Marko Savor

University of Quebec in Montreal

Date Written: November 29, 2010

Abstract

In this paper we examine the relative contributions of US and Canadian markets to price discovery for Canadian cross-listed options and their cross-listed underlying stocks. We use two different econometric approaches in assessing the contributions of each market to price discovery, the information shares approach and the common factor approach. Our empirical results are consistent in both approaches. We show that on average price discovery for cross-listed Canadian stocks and options takes place overwhelmingly in the underlying asset markets, where Canadian equity markets dominate the discovery process. The results show that option markets information shares remain comparable, although slightly higher in the US, which contrasts with the fact that its relative volume is almost ten times greater than that of Canadian options markets. The results also indicate a high degree of integration between Canadian and US markets for the underlying stocks of cross-listed options and show that the foreign exchange market does not contribute to the co integration between these markets to any significant extent. An analysis of the determinants of the relative information shares between firms with all markets analyzed simultaneously shows that the most important factor explaining the information shares is the volatility of underlying returns.

Keywords: contingent claims, market microstructure, interlisting, price discovery

JEL Classification: G14, G15

Suggested Citation

Czerwonko, Michal and Khoury, Nabil and Perrakis, Stylianos and Savor, Marko, One Security, Four Markets: Canada-US Cross-Listed Options and Underlying Equities (November 29, 2010). Available at SSRN: https://ssrn.com/abstract=1717246 or http://dx.doi.org/10.2139/ssrn.1717246

Michal Czerwonko

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Nabil Khoury

University of Quebec at Montreal (UQAM) - Faculty of Management (ESG) ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada
514-987-3000 x6717 (Phone)

Stylianos Perrakis

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Marko Savor (Contact Author)

University of Quebec in Montreal ( email )

Case postale 8888
Succursale Centre-ville
Montreal, Quebec H3C 3P8
Canada
514-987-3000 ext.: 8553 (Phone)

HOME PAGE: http://www.uqam.ca

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