Multi-Market Trading and Liquidity: Theory and Evidence

42 Pages Posted: 25 Jul 2004

See all articles by Shmuel Baruch

Shmuel Baruch

University of Rome Tor Vergata, Department of Economics and Finance

Michael L. Lemmon

University of Utah - Department of Finance

George Andrew Karolyi

Cornell University - SC Johnson College of Business

Date Written: December 2003

Abstract

In this paper, we develop and test a theoretical model of multi-market trading to explain the differences in the foreign share of trading volume of internationally cross-listed stocks. The model derives an equilibrium which predicts that, under fairly general conditions, the distribution of trading volume across exchanges competing for order flow is related to the correlation of the cross-listed asset returns that arise in the respective markets. That is, volume migrates to the exchange in which the cross-listed asset returns have greater correlation with returns of other assets traded on that market. We test this prediction with monthly stock returns and volume data on 275 non-U.S. stocks cross-listed on major U.S. exchanges. We find strong empirical support for the prediction, even after controlling for other firm-specific, issue-specific and country-level factors.

Keywords: International finance, cross-listings, trading, liquidity

JEL Classification: F30, G14, G15

Suggested Citation

Baruch, Shmuel and Lemmon, Michael L. and Karolyi, George Andrew, Multi-Market Trading and Liquidity: Theory and Evidence (December 2003). Available at SSRN: https://ssrn.com/abstract=567064 or http://dx.doi.org/10.2139/ssrn.567064

Shmuel Baruch (Contact Author)

University of Rome Tor Vergata, Department of Economics and Finance ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

George Andrew Karolyi

Cornell University - SC Johnson College of Business ( email )

174A STATLER HALL
ITHACA, NY 14853
United States
6142820229 (Phone)

HOME PAGE: http://https://www.johnson.cornell.edu/faculty-research/faculty/gak56/

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