Menkveld, A., Koopman, S., and Lucas, A. (2007). Modelling round-the-clock price discovery for cross-listed stocks using state space methods. Journal of Business and Economic Statistics, 25(2):213-255.
JournalJournal of Business and Economic Statistics
U.S. trading in non-U.S. stocks has grown dramatically. Around the clock, these stocks trade in the home market, in the U.S. market, and, potentially, in both markets simultaneously. We develop a general methodology based on a state space model to study 24-hour price discovery in a multiple-markets setting. As opposed to the standard variance ratio approach, this model deals naturally with (1) simultaneous quotes in an overlap, (2) missing observations in a nonoverlap, (3) noise due to transitory microstructure effects, and (4) contemporaneous correlation in returns due to market-wide factors. We apply our model to Dutch stocks, cross-listed in the United States. Our findings suggest a minor role for the New York Stock Exchange in price discovery for Dutch shares, in spite of its nontrivial and growing market share. © 2007 American Statistical Association.