Rediscovering Price Discovery

Abstract

In this article, we offer a guided tour of price discovery and show that this crucial topic remains open to methodological progress. Based on a fully identified structural model that yields explicit formulas, we clarify existing measures of price discovery: we interpret what they assess and expose their potential biases and limits. We also propose a simple, accurate and universal view of the price discovery process: the CovIS measure assesses the immediate impact of a shock and the SCIRFs highlight the entire discovery process. Our theoretical contributions enhance existing literature and include formal propositions, complemented by methodological clarification through illustrative examples. These examples derive from simulated data for validation, and reanalysis of prior studies, with and without data samples. Moreover, we provide an annotated R code for replication.

Keywords: Price Discovery, Information Shares, Cointegration, Vector Error Correction Model, Impulse Response Functions