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Modeling Round-the-Clock Price Discovery for Cross-Listed Stocks Using State Space Methods

33 Pages Posted: 6 Aug 2003 Last revised: 18 Jan 2012

Albert J. Menkveld

VU University Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Siem Jan Koopman

Vrije Universiteit Amsterdam; Tinbergen Institute

Andre Lucas

VU Amsterdam - School of Business and Economics; Tinbergen Institute

Abstract

U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. market and, potentially, in both markets simultaneously. We develop a general methodology based on a state space model to study 24-hour price discovery in a multiple markets setting. As opposed to the standard variance ratio approach, this model deals naturally with (i) simultaneous quotes in an overlap, (ii) missing observations in a non-overlap, (iii) noise due to transitory microstructure effects, and (iv) contemporaneous correlation in returns due to market-wide factors. We apply our model to Dutch stocks, cross-listed in the U.S. Our findings suggest a minor role for the NYSE in price discovery for Dutch shares, in spite of its non-trivial and growing market share.

Suggested Citation

Menkveld, Albert J. and Koopman, Siem Jan and Lucas, Andre, Modeling Round-the-Clock Price Discovery for Cross-Listed Stocks Using State Space Methods. Journal of Business and Economic Statistics, Vol. 25, 2007. Available at SSRN: https://ssrn.com/abstract=424522 or http://dx.doi.org/10.2139/ssrn.424522

Albert J. Menkveld (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Siem Jan Koopman

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Andre Lucas

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

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