Measuring Common and Market-Specific Information Flows

Abstract

When an asset is traded in multiple markets, the model of Hasbrouck (1995, 2021) assumes that information is priced sequentially across markets, thereby underestimates price innovations and information flows in slower markets. This study introduces a common information component across markets and mitigates the speed-induced bias. At intervals from 0.01 to 2 seconds, the common information shares are 66 - 94% between the listing and other exchanges, and 60 - 90% between quotes and trades. Allowing common information alters the ranking of market-specific information shares. As trading speed increases, the common information shares have increased over time.

Keywords: Price discovery, common information, market-specific information, high frequency trading, information share

JEL Classification: G10, G14, C32