Cross Return, Volatility and Order Imbalance in International Cross Listings

Abstract

The globalization of financial markets motivates plenty of non-U.S. companies listing their shares on the U.S. exchanges. Following Eun and Sabherwal (2003), we investigate the extent to which the NYSE and the TSX contribute to price discovery of the Canadian Stocks listing on these exchanges. By examining the effect of contemporaneous order imbalances on cross-border stock returns, we find that contemporaneous imbalance on the NYSE is significant to the stock returns on the TSX. Since the U.S. exchanges are the most liquid and largest exchanges in the world, they play a leading role in capital markets. Our findings imply that the NYSE significantly contributes to price discovery.Besides, we apply GARCH (1, 1) model to test the effect of contemporaneous imbalance on the cross-listing returns and the effect of trading volume on foreign return variance. We find that there is a significant influence of trading volume in domestic/foreign markets on the volatility of the stock return in foreign/domestic markets in our empirical results. The evidence shows that cross-listing helps informed traders distribute their trading across the two markets to make use of private information between the markets. This activity results in the increasing generation of private information, and then causes an increase in the stock return variance. However, contemporaneous order imbalance on the TSX/NYSE does not have an important impact on the stock returns on the NYSE/TSX. It means that order is not a good indicator of information flow. The significance in GARCH (1, 1) model comes from trading volume to the return volatility, not to the stock return. The insignificance for effect of order imbalance on the cross-board return represents limited capital flow between countries. The view supports evidence of segmentation between Canadian and the U.S. markets suggested by Foerster and Karolyi (1993).