One Security, Many Markets: Determining the Contributions to Price Discovery



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    • Stern School of Business, New York University. For comments on an earlier draft, I am indebted to the editor, the anonymous referees, Gail Belonsky, Frederick H. deB. Harris, Gautam Kaul, A. Craig MacKinlay, Ananth Madhavan, Terry Marsh, Maureen O'Hara, and presentation audiences at Duke University, University of Iowa, University of Missouri, Washington University, and the American Finance Association. The author is a former Visiting Academic Economist at the New York Stock Exchange. All errors are my own responsibility.


When homogeneous or closely-linked securities trade in multiple markets, it is often of interest to determine where price discovery (the incorporation of new information) occurs. This article suggests an econometric approach based on an implicit unobservable efficient price common to all markets. The information share associated with a particular market is defined as the proportional contribution of that market's innovations to the innovation in the common efficient price. Applied to quotes for the thirty Dow stocks, the technique suggests that the preponderance of the price discovery takes place at the New York Stock Exchange (NYSE) (a median 92.7 percent information share).