Information Shares Research Articles

Information shares for markets with partially overlapping trading hours

We study daily information shares for markets with partially overlapping trading hours. The established methodologies consider price discovery measures computed either for exactly overlapping trading hours or in sequential markets. In contrast, we develop a framework that exploits all price information generated during a full trading day in which any market can be open or closed at any time and propose a contribution-weighted information share. We apply this new method to the S&P 500 and NASDAQ-100 ETF and E-mini futures markets. It turns out that conventional information shares for the ETF markets are overestimated. E-mini futures are traded almost continuously throughout the trading day and process additional pricing relevant information when the ETF markets are closed.

Analytical properties of Hasbrouck and generalized information shares

This paper discusses analytical properties of Hasbrouck information share (HIS) and generalized information share (GIS). We reject the conventional designation of lower and upper bounds for HIS. Moreover, we show the difference between the GIS across the two markets is larger than the corresponding difference between the average HIS. Thus, the dominance-satellite relationship is more prominent when using GIS to measure the role of price discovery. Using the data of dual-class shares of Berkshire Hathaway Inc., we find approximately 74.34% of the price discovery occurs in the B-shares market, which is consistent with the stealth trading hypothesis.

Does Bitcoin dominate the price discovery of the Cryptocurrencies market? A time-varying information share analysis

Using a time-varying vector error correction model (VECM), we examine the dynamic information shares of the top four Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) and Litecoin (LTC) over 1/1/2016–31/12/2019. Although steadily decreasing, the information share of BTC is still the largest as of end-2019. The individual dominances of market capitalization and trading volume can explain 20% of variations of the BTC information share but only 6% of those for ETH.

THE LEAD LAG RELATIONSHIP BETWEEN SPOT AND FUTURES MARKETS IN THE ENERGY SECTOR: EMPIRICAL EVIDENCE FROM INDIAN MARKETS

The study aims at finding the intraday Lead-Lag relationship between Spot and Futures Market for Energy Sectors Stocks on which Single Stock Futures (SSFs) is available, by applying 1-Minute Price Returns for the period ranging from 1st April 2017 to 31st March 2019. The study explores Price-Discovery between Stock Futures and their Underlying Stocks by applying Vector Error Correction Model, Hasbrouck (1995) Information Shares, and Common Factor Component Weights of Gonzalo and Granger (1995). The findings indicate that trades in the Futures Market contribute more to Price-Discovery than Spot Market.Keywords: Energy Sector, Single Stock Futures; Price-Discovery; Information share; VECM; CointegrationJEL Classifications: G11, G14DOI: https://doi.org/10.32479/ijeep.9783

Bootstrap Confidence Intervals and Hypothesis Testing for Market Information Shares

Abstract Market information shares are widely used in empirical finance to measure one market’s contributions to price discovery. In contrast to common factor components, the literature on market information shares only provides rudimentary tools to test general hypotheses. Using Monte Carlo simulations, we show that bootstrap confidence bands proposed by Sapp (2002) perform well if markets have similar information shares but are too narrow if one market dominates price discovery. We design a new bootstrap-based method to test the “one-central-market” hypothesis and show that our tests have correct size and substantial power against the null hypothesis. Empirical results in the context of CDS and bonds markets complement the theoretical analysis.

A Tale of Two Cities - Inter-Market Latency, Market Integration, and Market Quality

We study the introduction of a microwave link between Frankfurt and London and identify its effects on German stocks that trade in both locations using French firms that trade only in London as the control group. We find that the link improves the integration between the two markets as evidenced by a reduction in arbitrage opportunities. The effects on market quality differ across stocks as high-frequency traders strategically utilize their speed advantage to supply or consume liquidity. In London, mid cap stocks benefit from increased liquidity provision whereas order flow for large stocks becomes more toxic. London's increased competitiveness for mid cap stocks also translates into an increase in its information share, while the information shares of large cap stocks are unchanged. These results suggest that market integration differently affects investors based on their speed advantage, trading venues based on their level of competitiveness, and stocks based on their size.

Price Discovery in High Resolution

Abstract U.S. equity market data are currently timestamped to nanosecond precision. This permits models of price dynamics at resolutions sufficient to capture the reactions of the fastest agents. Direct estimation of multivariate time series models at sub-millisecond frequencies nevertheless poses substantial challenges. To facilitate such analyses, this paper applies long distributed lag models, computations that take advantage of the inherent sparsity of price transitions, and bridged modeling. At resolutions ranging from 1 s down to 10 μs, I estimate representative models for two stocks (IBM and NVDA) bearing on three topics of current interest. The first analysis examines the extent to which the conventional source of market data (the consolidated tape) accurately reflects the prices observed by agents who subscribe (at additional cost) to direct exchange feeds. At a 1-s resolution, the information share of the direct feeds is indistinguishable from that of the consolidated tape. At resolutions of 100 and 10 μs, however, the direct feeds are totally dominant, and the consolidated share approaches zero. The second analysis examines the quotes from the primary listing exchange vs. the non-listing exchanges. Here, too, information shares that are essentially indeterminate at 1-s resolution become much more distinct at higher resolutions. Although listing exchanges execute about one-fifth of the trading volume, their information shares are slightly above one-half. The third analysis examines quotes, lit trades, and dark trades. At a 1-s resolution, dark trades appear to have a small, but discernible, information contribution. This vanishes at higher resolutions. Quotes and lit trades essentially account for all price discovery, with information shares of roughly 65% and 35%, respectively.

Information share and its predictability in the Indian stock market

AbstractThe study investigates price discovery in the Indian stock market and finds that spot market plays a dominating role in price discovery when it is estimated for the entire period as a whole. However, periodic measures of price discovery suggest that it does not remain the same throughout the period, but varies with time. Panel data analysis also indicates that spot market is more efficient in price discovery for majority of size and sector panels. Finally, while market state‐related variables are found to impact information shares in a majority of the cases, macroeconomic announcements rarely predict the price discovery.

Price Discovery in the Stock, OTC Corporate Bond, and NYSE Corporate Bond Markets

This paper examines intraday price discovery in three closely-related U.S. markets: stocks, Over-The-Counter (OTC) corporate bonds, and New York Stock Exchange (NYSE) electronically-traded corporate bonds. We calculate the Hasbrouck (1995) information shares of these three markets over five years. We find that OTC corporate bond trades have a 5.7% information share, despite zero pre-trade transparency in the OTC market. Further, NYSE corporate bonds have a 45.8% information share, despite having a tiny market share, because of publicly-displayed, frequently-updated bid-ask quotes that can be traded at any time. OTC corporate bond information shares are inversely related to credit quality and are relatively constant over time. This is consistent with multi-security informed trading theory and the Merton (1974) corporate bond model. NYSE corporate bond information shares are positively related to their update frequency. Thus, the subset of NYSE bonds that are updated more frequently are more informative.

Price Discovery in High Resolution

US equity market data are currently timestamped to nanosecond precision. This permits models of price dynamics at resolutions sufficient to capture the reactions of the fastest agents. Direct estimation of multivariate time series models at sub-millisecond frequencies nevertheless poses substantial challenges. To facilitate such analyses, this paper applies long distributed lag models, computations that take advantage of the inherent sparsity of price transitions, and bridged modeling. At resolutions ranging from one second down to ten microseconds, I estimate representative models for two stocks (IBM and NVDA) bearing on three topics of current interest. The first analysis examines the extent to which the conventional source of market data (the consolidated tape) accurately reflects the prices observed by agents who subscribe (at additional cost) to direct exchange feeds. At a one-second resolution, the information share of the direct feeds is indistinguishable from that of the consolidated tape. At resolutions of 100 and 10 microseconds, however, the direct feeds are totally dominant, and the consolidated share approaches zero. The second analysis examines the quotes from the primary listing exchange vs. the non-listing exchanges. Here, too, information shares that are essentially indeterminate at one-second resolution become much more distinct at higher resolutions. Although listing exchanges execute about one fifth of the trading volume, their information shares are slightly above one-half. The third analysis examines quotes, lit trades, and dark trades. At a one-second resolution, dark trades appear to have a small, but discernible, information contribution. This vanishes at higher resolutions. Quotes and lit trades essentially account for all price discovery, with information shares of roughly 65% and 35%, respectively.

Dynamics and determinants of credit risk discovery: Evidence from CDS and stock markets

This paper investigates the dynamics and drivers of credit risk discovery between stock and CDS markets in the US. Our research is distinguished from the existing literature in three aspects: 1) we employ an improved method to measure the information share; 2) we discover new drivers of credit risk discovery; and 3) we assess the impact of central clearing counterparty (CCP) on the CDS market. By using the generalized information share (GIS) by Lien and Shrestha (2014), we address the issue that the CDS and stock prices do not have one-to-one cointegration relation. The empirical results support the use of GIS instead of more conventional measures. We also find that eliminating transitory price components increases the information share of the CDS market in the earlier period of the sample. The economic condition and funding cost turn out to affect the information share of the CDS market negatively. Another interesting finding is that the CDS of investment grade firms possess higher information shares compared to speculative grade firms. Finally, CCP seems to reduce the information share of CDS, which suggests that the CDS market is driven largely by insider trading.

Stock Market Liberalization and Price Discovery: Evidence from the Shanghai-Hong Kong Stock Connect

This paper studies the price-discovery process for a number of Chinese stocks cross-listed in Shanghai and Hong Kong (SH-HK stocks) in the two periods before and after the Shanghai-Hong Kong Stock Connect, which has greatly eliminated the ownership restriction of A-H shares and liberalized the stock markets in China. Since the Connect enables investors in each market to trade shares listed in the other market by using their local brokers and clearing houses, which also changes the set of investors that participate in each market, it is reasonable to expect that the information incorporated in A-H prices may also change. Indeed, there exists a significant structural change in the AH premium index that coincides with the implementation of the Connect. We use two measures to determine each market's relative contribution to price discovery: common factor weights from Gonzalo and Granger's (1995) permanent transitory model (PT model) and information shares (IS model) defined by Hasbrouck's (1995). We find that for SH-HK stocks, the SH and HK markets do not contribute equally to the price discovery process. Measured by common factor weight, on average HK market contributes 78.6% (91.4%) to price discovery before (after) the Connect. Using information share as measurement, HK market's average contribution is 73.2% (76.3%) before (after) the Connect. The t-tests suggest that the average common factor weight and information share of HK market are significantly greater than 50%, suggesting that the HK market contributes substantially more in the price discovery process. A possible explanation for this finding is that most firms list their H shares earlier than A shares, thus H share price may serve as a reference when A shares become listed and traded, which leads to a greater weight of H share price in the common factor. As the Connect only affects SH-HK stocks, I also use stocks cross-listed in Shenzhen and Hong Kong (SZ-HK stocks) as the control group to analyze the influence of the Connect on each market's relative contribution to price discovery. The results show that on average, the Connect increases the information share of SH market by 17.4%. The economic meaning is that when the better informed investors in HK market trade A shares in SH market through the Connect, the A share price will incorporate more information, which will improve SH market's relative contribution to price discovery. The implication is that the liberalization of an emerging stock market to investors from a developed market will improve its function in price discovery.

Information shares in a two-tier FX market

Abstract Using several measures of information share, we examine price discovery across the inter-dealer and dealer–customer market tiers in the currencies market. In the spot market, the information share of the inter-dealer tier is higher than that of the dealer–customer one for non-financial sector trades and is lower than the dealer–customer tier for foreign investors’ sell trades. In the forward market, the dealer–customer tier generally has the greater information share at the dealer’s buy side. Our results indicate the market where customers’ trades are the most informative and demonstrate how exogenous events affect price discovery across markets and market tiers.

Of Leaders and Followers - An Econometric Analysis of Equity Analysts and Stock Market Investors

We measure the information content of monthly analyst consensus forecasts for one-year-forward earnings per share (EPS) based on two well-established price discovery measures drawn from the area of market micro-structure research. Employing a 36-year sample of large US companies listed in the S&P 100 Index, we compute (i) Hasbrouck's information shares and (ii) Gonzalo and Granger's common factor component shares to measure the relative share that market participants and analysts have in the process of price discovery. We find that while analysts do not lead the capital market, they have a small but significant share in the process of price discovery, amounting to 4.6% (Hasbrouck) and 18.0% (Gonzalo and Granger) on average. This share varies significantly in the cross-section. We identify the level of analyst coverage as an explanatory factor: The greater a company's coverage, the smaller is the analysts' information share. This finding can be explained by analysts' herding behavior as well as by company incentives, which lower the information content of their estimates.

Information Shares in Stationary Time Series and Global Volatility Discovery

Standard price discovery measures, particularly information shares, rely on the concept of co-integration for non-stationary time series. For the definition of information shares, the existence of a permanent impact of innovations is crucial, as these shares measure the relative contribution of different markets to this permanent impact. For stationary time series such as interest rates, CDS prices, or volatilities, a permanent impact however does not occur and thus the concept fails and lacks an interpretation. In this paper we extend the concept of information shares to the case of stationary time series. We suggest a price discovery measure based on the well-known variance decomposition for stationary time series, aiming to be equivalent to Hasbrouck's information share. We show that this new price discovery measure converges to the standard information share in the border case of non-stationarity.

Information Shares in a Two-Tier FX Market

Using several popular measures of information share, we examine price discovery across the inter-dealer and dealer-customer market tiers in the foreign exchange market. We generally find that the information share of the inter-dealer tier is higher than that of the dealer-customer one for non-financial sector trades and is lower than the dealer-customer tier for financial sector trades. In the forward market, we find that the dealer-customer tier generally has the greater information share. Our results indicate the market where customers' trades are the most informative and how exogenous events can affect price discovery across markets and market tiers.

Global information distribution in the gold OTC markets

This paper aims to estimate the global information distribution in the OTC gold market. Using the two-scale realized variance as a proxy for information flow, we estimate the information shares of Asia, Europe, London/New York and the United States, with London/New York covering the two-hour overlapping trading in London afternoon and New York morning. We find that over the sample period of 1996 to 2012, the average daily information shares are 17%, 31%, 22%, and 30% for Asia, Europe, London/New York and the U.S., respectively. On a per-hour basis, the information share of London/New York is over two and half times of those of the rest of Europe and the U.S., and over five times of the information share of Asia. Despite doubling its share of OTC trading, Asia's information share actually declined from about 20% in the late 1990s to around 15% in 2009–2012, with the opposite trend for the London/New York market. Private information flow, measured by the volatility impact of unexpected order flows, has a flatter distribution across Asia, Europe, and the U.S., possibly due to the presence of the same large gold dealers in different markets. The declining information share of Asia and the concentration of information to the two-hour London/New York trading raise concerns for regional market development and global market stability.

Information Shares of Two Parallel Currency Options Markets: Trading Costs versus Transparency/Tradability

This paper studies whether trading costs or transparency/tradability are more important to price discovery using a unique dataset of currency options that trade simultaneously in two parallel markets. The Over-The-Counter (OTC) market is characterized by sophisticated investors, low trading costs, and low transparency/tradability compared to the Tel-Aviv Stock Exchange (TASE). Pricing errors are much larger on the TASE and the information share of the OTC market is significantly larger than that of the TASE by various information share measures, showing that trading costs and trader type have a first-order effect on price discovery while transparency/tradability have a second-order effect.

Information shares of two parallel currency options markets: Trading costs versus transparency/tradability

Abstract This paper studies whether trading costs or transparency/tradability are more important to price discovery using a unique dataset of currency options that trade simultaneously in two parallel markets. The Over-The-Counter (OTC) market is characterized by sophisticated investors, low trading costs, and low transparency/tradability compared to the Tel-Aviv Stock Exchange (TASE). Pricing errors are much larger on the TASE and the information share of the OTC market is significantly larger than that of the TASE by various information share measures, showing that trading costs and trader type have a first-order effect on price discovery while transparency/tradability have a second-order effect.

Crossing the Tasman

Purpose – The purpose of this paper is to investigate price discovery for cross-listed stocks on the New Zealand Exchange (NZX) and the Australian Stock Exchange (ASX) and find out the determinants of price discovery between the two markets. Design/methodology/approach – Gonzalo Granger Component Shares and Hasbrouck Information Shares were estimated annually for a sample of 19 cross-listed stocks between 1998 and 2012. Then dynamic panel regressions were used to investigate the driving factors behind price discovery between the NZX and ASX. Findings – Strong downward trends were observed in the contribution to price discovery of the NZX, both for New Zealand firms cross-listing on the ASX and Australian firms cross-listing on the NZX. While in the early years in our sample period, price discovery is dominated by the home market, by 2012, 50 per cent of price discovery for New Zealand firms takes place on the ASX, and the NZX acts as a satellite market for Australian firms. It was also observed that the NZX share of trading activity has a strong positive effect on the NZX level of price discovery, while there is a negative relationship with relative bid–ask spreads. Practical implications – Results suggest that the importance of the NZX relative to the ASX with regards to price discovery is decreasing over time. Given the importance of price discovery for exchanges, such a finding is concerning for the NZX. The determinants of price discovery found in the paper, such as relative volume and spreads, do, however, offer some guidance on how the NZX could regain price discovery. Originality/value – This paper offers a longer and broader analysis of price discovery between the NZX and ASX, two highly integrated markets, and extends previous work by exploring the drivers of price discovery in a panel setting.