Price Discovery Across the Rhine
35 Pages Posted: 15 Aug 2001
Date Written: July 2001
This Paper studies the formation of opening prices for German and French stocks, simultaneously traded in Frankfurt and Paris. We analyse theoretically the case where investors and traders based in the same country as the firm have better information on its value than foreign traders. Our model implies that prices set on the domestic market should be informationally more efficient than prices set on the foreign market. For German stocks, our empirical results are consistent with theory. The informational efficiency of French stock prices is comparable in the two markets when the Frankfurt specialist can observe Paris preopening prices before opening the market.
Keywords: International financial markets integration, information assymeteries, market microstructure
JEL Classification: F12, F21, F30
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