Where Does Price Discovery Occur for Stocks Traded in Multiple Markets? Evidence from Hong Kong and London Stocks

Posted: 7 Dec 2004

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Chunlin Liu

University of Rhode Island

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Abstract

Using a sample of Hong Kong-listed stocks that are also traded on the London Stock Exchange, we document the following results: first, London market makers use Hong Kong's closing prices as the benchmark for setting the opening prices in London. Second, trading in the London market plays only a limited role in price discovery in the Hong Kong market. Third, the stock returns from London trading are closely correlated with those of the Hong Kong market. The above findings are consistent with the explanation that London trading is predominantly liquidity-driven but not information-driven.

Keywords: Dually-listed stocks, Price discovery, Liquidity-driven trading

JEL Classification: G14, G15

Suggested Citation

Agarwal, Sumit and Liu, Chunlin and Rhee, S. Ghon, Where Does Price Discovery Occur for Stocks Traded in Multiple Markets? Evidence from Hong Kong and London Stocks. Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=617321

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Chunlin Liu (Contact Author)

University of Rhode Island ( email )

Kingston, RI 02881
United States

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

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