Multimarket Trading and Liquidity: Theory and Evidence

Abstract

We develop a new model of multimarket trading to explain the differences in the foreign share of trading volume of internationally cross-listed stocks. The model predicts that the trading volume of a cross-listed stock is proportionally higher on the exchange in which the cross-listed asset returns have greater correlation with returns of other assets traded on that market. We find robust empirical support for this prediction using stock return and volume data on 251 non-U.S. stocks cross-listed on major U.S. exchanges. Copyright 2007 by The American Finance Association.

Exchange trading rules, governance, and trading location of cross-listed stocks

“…We do this using a The results hold after controlling for the information share measure. The summary statistics for the information share are in Table 2, and are similar to those reported in Baruch et al (2007). The results are in Table 11.…”

“…Baruch et al (2007) find that the information share increases the level of volume in the US market. That is, the higher the correlation between home returns and US returns, the greater the amount of US trade.…”

“…The goal is to assess the impact of information from the US market factor. We use lead and lag terms in Equation 5 and Equation 6 in order to control for non-synchronious trading (following Baruch et al, 2007).…”

“…Baruch et al (2007) hypothesize and find that the level of US trading volume for cross-listed stocks in part depends upon the correlation of (a) the returns on the firm's non-US stock with (b) the returns on the domestic market and the returns on the US market. That is, amount of US volume depends on (a) the correlation of the non-US stock with non-US assets, and (b) the correlation of the non-US stock with US assets.…”

“…We capture this in the similar way to Baruch et al (2007). For each year we compute an 'information share' for the stock.…”