Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets

Harris, Frederick H. deB.; McInish, Thomas H.; Shoesmith, Gary L.; Wood, Robert A.

doi:10.2307/2331277

Cited by 318 publications

(208 citation statements)

References 22 publications

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“…We apply the same filters as for the US 12 Hasbrouck (1995) concludes that the contribution of the regional markets to the price discovery process of NYSE listed stocks is negligible. Harris et al (1995), however, observe that both the NYSE and the regional markets error correct to deviations from each other, therefore suggesting that the regional quotes do are informative. Tse (2000) compares the methodologies used in these papers.…”

Section: Datamentioning

confidence: 91%

Asymmetries in bid and ask responses to innovations in the trading process

Escribano

Pascual

2005

Empirical Economics

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This paper proposes a new approach to jointly model the trading process and the revisions of market quotes. This method accommodates asymmetries in the dynamics of ask and bid quotes after trade related shocks. The empirical spec ification is a vector error correction (VEC) model for ask and bid quotes, with the spread as the co integrating vector, and with an endogenous trading process. This model extends the vector autoregressive (VAR) model introduced by Hasbrouck (Hasbrouck J (1991) Measuring the information content of stock trades. J Finance 46:179 207). We provide evidence against several symmetry assumptions, very familiar among microstructure models. We report asymmetric adjustments of ask and bid prices to trade related shocks, and asymmetric impacts of buyer and seller initiated trades. In general, buys are more informative than sells. The likelihood of symmetric quote responses increases with volatility. We show that our findings are robust across different model specifications, time frequencies, and trading periods. Moreover, we find similar asymmetries in markets with different microstructures.

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Section: Datamentioning

confidence: 91%

Asymmetries in bid and ask responses to innovations in the trading process

Escribano

Pascual

2005

Empirical Economics

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“…In this section, we first perform unit root and cointegration tests for each stock and then employ an Error Correction Model (ECM) to assess the contribution of each price series to price discovery. The adoption of this methodology is motivated by recent work of Hasbrouck (1995), Harris et al (1995), Huang (2002), and Eun and Sabherwal (2003), who examine the information content of prices of the same security observed in different markets. Our analysis focuses on prices of a stock estimated from different steps of the order book.…”

Section: Order Book Information and Stock Valuesmentioning

confidence: 99%

“…Our approach utilizes the error correction models that have been used extensively in the price discovery literature on information content of prices of the same security observed in different markets. Examples include, but are not limited to, Hasbrouck (1995Hasbrouck ( , 2002, Harris et al (1995), Huang (2002), and Eun and Sabherwal (2003).…”

Section: Error Correction Modelsmentioning

confidence: 99%

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The Informational Content of an Open Limit Order Book

Cao

Hansch

Beardsley³

2004

SSRN Journal

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We assess the informational content of an open limit order book from three directions: (1) Does the limit order book allow better inferences about a security's value than simply the best bid and offer prices from the first step of the book? If it does, how much additional information can be gleaned from the book? (2) Are imbalances between the demand and supply schedules informative about future price movements? and (3) Does the shape of the limit order book impact traders' order submission strategies? Our empirical evidence suggests that the order book beyond the first step is informative-its information share is about 30%. The imbalance between demand and supply from step 2 to 10 provides additional power in explaining future short-term returns. Finally, traders do use the available information on the state of the book, not only from the first step, but also from other steps, when developing their order submission strategies. JEL Classification Numbers: G10, G12, G13Keywords: Limit order book, price discovery, order placement strategy, demand and supply schedule A majority of stock markets around the world are organized as electronic limit order books.Among the reasons advanced for their popularity is the greater transparency offered by these systems compared to dealer market settings. A typical limit order book system allows its users to view depth at a number of price levels at and away from the market, while dealer markets usually rely on dissemination of only the dealers' best quotes. In a limit order book, all displayed prices and quantities are typically executable instantaneously, whereas in dealer markets prices for trades beyond the quoted size need to be assessed through negotiations between traders and market makers. Also, market makers may offer price improvement for trades up to quoted size.Although limit order book trading systems have been successful around the world, little research has been done to address the value of the information contained in the order book. 1 In particular, one important question that left unanswered is whether the demand and supply schedules as expressed in the limit orders to buy and sell contain information beyond the best bid and offer prices. Clearly, the immediate benefit of being able to view the book is the ability to assess the cost of buying or selling a certain number of shares. Unlike dealer markets, where orders may receive price improvement or have to be negotiated if they exceed quoted depth, limit order books allow almost perfect assessment of an order's price. 2 The purpose of this paper is to address three related questions. First, does the limit order book allow better inferences about a security's value than simply the best bid and offer prices? If it does, how much additional information can be gleaned from the book? Second, are imbalances between the demand and supply schedules informative about future price movements? Finally, does the shape of the limit order book impact traders' order submission strategies?In the price discovery literatur...

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“…The so-called component share uses the orthogonal projections of the adjustments coefficients in the VECM model, α ⊥ , as a measure of price discovery, where the market that presents the highest element of α ⊥ is the most important in the price discovery process (see, among others, deB. Harris, McInish, & Wood, 2002;Harris, McInish, Shoesmith, & Wood, 1995). More recently, 4 The setup analyzed in the empirical part of this paper consists on up to three common factors, namely the efficient price, the efficient exchange rate, and the dual class premium.…”

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confidence: 99%

Price discovery in dual‐class shares across multiple markets

Fernandes¹,

Scherrer

2017

Journal of Futures Markets

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This paper proposes a new measure of price discovery that uses the spectral decomposition. The methodology is especially important in the context of large price systems, such as interest rate parities with spot and futures contracts or dual-class shares in multiple markets. We employ high frequency data to study price discovery in dual-class Brazilian stocks and their ADRs. We find that the foreign market is at least as informative as the home market and that shocks in the dual-class premium entail a permanent effect in normal times, but transitory in periods of financial distressFinancial markets have the important function of discovering the price of a given asset. The increasing availability of highfrequency data allows us to study how efficiently and timely each market reacts to news in a much more precise manner. There is a large number of companies being listed in more than one exchange mainly because cross-listing allows raising equity capital, at a lower cost and increasing liquidity. Besides, it may also improve minority shareholder protection (Stulz, 1999), increase firm value (Doidge, Karolyi, & Stulz, 2004), and lower private benefits of control (Doidge, 2004). There are 498 foreign companies from 46 different countries listed on NYSE as of June 30, 2016. As a result, geographical price discovery is of major interest for domestic stock exchanges and companies (see, for instance, Eun & Sabherwal, 2003). This paper extends the standard price discovery methodology to deal with high-dimension portfolios. Applications include interest rate parities using both spot and future contracts in interest rate and exchange rate markets as well as dual-class assets traded on multiple markets. We focus on the latter. The idea is to exploit every piece of information about the fundamental value of a firm by looking at the prices of both common and preferred shares across different trading platforms. As a by-product, by looking at the difference between prices of common and preferred shares, we may also shed some light on the behavior of the dual-class premium.The main technical difficulty is to contrive a unique price discovery measure that does not assume a priori which share class and/or market lead the impounding of new information. For the standard information share (IS) measure of price discovery (Hasbrouck, 1995), which gauges the fraction of the variance of the fundamental price innovation due to the variance of a given asset/market price innovation, one normally imposes a triangular structure from the most informative to the least informative market price in order to handle contemporaneous correlations. ISs will thus depend on the specific ordering in the price system.One solution is to consider the average IS across different orderings of market prices. This is a simple and effective solution if there are only a few market prices. However, as the number of assets/markets increase, one would have to average over thousands J Futures Markets. 2018;38:129-155.wileyonlinelibrary.com/journal/fut

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Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets

Cited by 318 publications

References 22 publications

Asymmetries in bid and ask responses to innovations in the trading process

Asymmetries in bid and ask responses to innovations in the trading process

The Informational Content of an Open Limit Order Book

Price discovery in dual‐class shares across multiple markets

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