One Security, Many Markets: Determining the Contributions to Price Discovery

Abstract

When homogeneous or closely-linked securities trade in multiple markets, it is often of interest to determine where price discovery (the incorporation of new information) occurs. This paper suggests an econometric approach based on an implicit unobservable efficient price common to all markets. The information share associated with a particular market is defined as the proportional contribution of that market's innovations to the innovation in the common efficient price. Applied to quotes for the thirty Dow stocks, the technique suggests that the preponderance of the price discovery takes place at the NYSE (a median 92.7% information share).

JEL Classification: G11