MAIN OR SATELLITE? TESTING CAUSALITY‐IN‐MEAN AND VARIANCE FOR DUALLY LISTED STOCKS

Abstract

ABSTRACTThis paper extends prior research on the dominant‐satellite relationship of dually listed stocks. We use a robust test for causality‐in‐variance and causality‐in‐mean to explore for any information feedback effect between stocks listed in two non‐synchronized international markets. We apply a GARCH‐expanded error correction model to a sample of 15 cross‐listed stocks on the Tel‐Aviv Stock Exchange (considered here as the domestic market) and NASDAQ. The domestic market was found generally the driver of prices' mean and variance, indicating that price discovery occurs in the domestic market. In addition, we find that the stock volatility both in the domestic and the foreign markets is affected by the exchange rate innovations. Also, although the foreign exchange rate between the U.S. dollar and the Israeli Shekel was volatile in recent years, our findings show that the prices of the dual securities are generally co‐integrated, indicating both an absence of arbitrage opportunities and long‐term equilibrium. Copyright © 2011 John Wiley & Sons, Ltd.