Security price adjustment across exchanges: an investigation of common factor components for Dow stocks

Frederick H. deB. Harris, Thomas H. McInish, Robert A. Wood
2002 Journal of financial markets  
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 Q GG 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
more » ... weight (f NYSE ) approximated the NYSE's 86% share of the trades. However, by 1992 f NYSE had declined precipitously 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. r
doi:10.1016/s1386-4181(01)00017-9 fatcat:byzapxx4ovf6ricszjfezoubqq