PRICE DISCOVERY FOR CROSS-LISTED STOCKS

Cheol S. Euna and Sanjiv Sabherwal

We investigate price discovery for internationally traded stocks. For a sample of Canadian stocks cross-listed on the Toronto Stock Exchange (TSE) and the NYSE, we find that both markets contribute to price discovery. The US share of price discovery ranges from 0.4% to 98.1%, and averages 36%. The US contribution is directly related to the US share of trading and to the ratio of proportions of informative trades on the NYSE and the TSE, and inversely related to the ratio of bid–ask spreads on the NYSE and the TSE. In response to a positive shock to the C$/US$ exchange rate, stock prices on the TSE rise, whereas those on the NYSE decline. The NYSE bears a much greater burden of adjusting to the exchange rate changes.