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