Security price adjustment across exchanges: An investigation of common factor components for Dow stocks
Abstract
VECMs can detect trades that permanently move the markets in cross-listed stocks. We employ Gonzalo and Granger's (J. Business Econom. Stat. 13 (1995) 1) reduced-rank regressions and QGG test statistic to analyze the common factor weight attributable to three informationally-linked exchanges for DJIA stocks over 1988-1995. We distinguish this error correction approach to trading price adjustment from the information shares approach to quote price leadership. In 1988, a 72.2% mean common factor weight (fNYSE) approximated the NYSE's 86% share of the trades. However, by 1992 fNYSE had declined precipitiously for 27 Dow stocks, averaging only 49.6%, despite an unchanged 86% share of the trades. By 1995, the NYSE's common factor weight had recovered, averaging 62.9% on 84% of the trades. We discuss three alternative microstructure-theoretic hypotheses that can confront this evidence. © 2002 Elsevier Science B.V. All rights reserved.
Publication Title
Journal of Financial Markets
Recommended Citation
Harris, F., McInish, T., & Wood, R. (2002). Security price adjustment across exchanges: An investigation of common factor components for Dow stocks. Journal of Financial Markets, 5 (3), 277-308. https://doi.org/10.1016/S1386-4181(01)00017-9
