Price Discovery in Interrelated Markets

Authors

  • Donald Lien,

    Corresponding author
    1. Donald Lien is Richard S. Liu Distinguished Chair in Business, Department of Finance, East Asia Institute, University of Texas at San Antonio, San Antonio, Texas
    • Correspondence author, Department of Finance, East Asia Institute, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249. Tel: 210 458 7312, Fax: 210 458 4319, e-mail: don.lien@utsa.edu

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  • Keshab Shrestha

    1. Keshab Shrestha is an Associate Professor at the Risk Management Institute, National University of Singapore, Singapore
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  • We would like to thank the editor, Bob Webb, two anonymous referees, and participants in Risk Management Institute research seminar for helpful comments and suggestions. The usual disclaimer applies.

Abstract

In this study, we generalize the information share (IS) proposed by Hasbrouck (1995) and extended by Lien and Shrestha (2009). The new generalized information share (GIS) can be used to analyze the price discovery process in interrelated securities markets, whereas the previous two measures can only be applied to almost identical markets. Thus, using the GIS, we can analyze broader markets thereby improving our understanding of the price discovery process as well as the efficiency of securities markets. As an empirical demonstration of the proposed method, we apply the GIS to credit default swap (CDS) and bond markets, and find that for the majority of cases price discovery mostly takes place in the CDS markets. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:203–219, 2014

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