| Abstract: |
We analyze the structural determinants of two widely used measures of price
discovery between multiple markets that trade closely-related securities.
Using a structural cointegration model, we show that both the information
share (IS) and component share (CS) measures account for the relative
avoidance of noise trading and liquidity shocks, but that only the IS can
provide information on the relative informativeness of individual markets. In
particular, the IS of one market is higher if it incorporates more new
information and/or impounds less liquidity shocks. Use of the CS in
conjunction with the IS can help sort out the confounding effects of the two
types of shocks. Furthermore, we find that the IS only accounts for the
immediate (one-period) responses of market prices to the news innovation which
implies that the IS estimates based on high sampling frequencies may be
distorted by transitory frictions and may miss important price discovery
dynamics. |