Top

Review of Quantitative Finance and Accounting

Published in:

01-04-2012 | Original Research

The makings of an information leader: the intraday price discovery process for individual stocks in the DJIA

Authors: Marc W. Simpson, Jose F. Moreno, Teofilo Ozuna

Published in: Review of Quantitative Finance and Accounting | Issue 3/2012

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

The main purpose of this paper is to construct an intraday arbitrage price series for each stock in the DJIA using information in the Diamond Trust Fund ETF. We then compute the information shares (Hasbrouck in J Finan 50(4):1175–1199, 1995) for the actual versus the arbitrage prices for each stock. While previous literature documents that ETFs lead stock indices in information origination, we find that some firms are “information leaders” in that the information share that comes from the stock price is larger than that which comes from the ETF-related arbitrage price. Further analysis is conducted to uncover the firm-specific factors that are related to a stock’s role in information generation.

previous article CEO incentives and the cost of debt

next article Investment opportunity set, political connection and business policies of private enterprises in China

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Available only for authorised users

In this case, an outlier is defined as a price with a change greater than 10% from one minute to the next above or below the nearest 10 prices.

Recall that Dow divisor is updated periodically and adjusted to compensate for the substitution of any constituent or the effect of stock dividends, splits, spin-offs and other applicable corporate actions into the current components of the DJIA.

For five of the arbitrage price series, DIS, PG, PFE, T and WMT, the ADF tests reject the null that the series, in levels, possesses a unit root. However, when these series are tested using Kwiatkowski et al. (1992) stationary test the null hypothesis that the series are stationary is rejected. In the end, removing these series from the analysis does not qualitatively alter the conclusions of the study. .

Ates A, Wang GHK (2005) Information transmission in electronic versus open-outcry trading systems: an analysis of U.S. equity index futures markets. J Futures Markets 25(7):679–715CrossRef

Choy S, Zhang H (2010) Trading costs and price discovery. Rev Quant Finan Account 34(1):37–57CrossRef

Cohen KJ, Hawawini GA, Maier SF, Schwartz RA, Whitcomb DK (1983) Friction in the trading process and the estimation of systematic risk. J Finan Econ 12:263–278CrossRef

Dacorogna M, Gencay R, Muller UA, Olsen R (2001) An introduction to high-frequency finance. Academic Press, London

Enders W (2003) Applied econometric time series. 2nd, Wiley

Engle RF, d Russell JR (2005) Analysis of high frequency financial data. In: Ait-Sahalia Yacine, Hansen Lars (eds) Handbook of Financial Econometrics. North-Holland

Engle RF, Granger CWJ (1987) Co-integration and error correction: representation, estimation and testing. Econometrica 55(2):251–276CrossRef

Falkenberrry TN (2002) High frequency data filtering. White paper, Tick Data Inc

Fama EF, French KR (1992) The cross-section of expected stock returns. J Finan 47:427–465CrossRef

Forsythe R, Palfrey TR, Plott CR (1982) Asset valuation in an experimental market. Econometrica 50(3):537–567CrossRef

Forsythe R, Palfrey TR, Plott CR (1984) Futures markets and informational efficiency: a laboratory examination. J Finan 39(4):955–981CrossRef

Gutierrez J, Tse Y (2009) NYSE execution quality subsequent to migration hybrid. Rev Quant Finan Account 33(1):59–81CrossRef

Harris FH, McInish TH, Wood RA (2002) Security price adjustment across exchanges: an investigation of common factor components for Dow stocks. J Finan Mark 5(3):277–308CrossRef

Hasbrouck J (1995) One security, many markets: determining the contributions to price discovery. J Finan 50(4):1175–1199CrossRef

Hasbrouck J (2003) Intraday price formation in U.S. equity index markets. J Finan 58(6):2375–2399CrossRef

Hendry DF (2001) Achievements and challenges in econometric methodology. J Econ 100:7–10

Kadapakkam P, Misra L, Tse Y (2003) International price discovery for emerging market stocks: evidence from Indian GDRs. Rev Quant Finan Account 21(2):59–81

Kurov A, Lasser D (2002) Price dynamics in the regular E-mini futures markets. J Finan Quant Anal 39(2):365–384CrossRef

Kwiatkowski D, Phillips PCB, Schmidt P, Shin Y (1992) Testing the null hypothesis of stationary against the alternative of a unit root. J Econ 54:159–178

Martens M (1998) Price discovery in high and low volatility periods: open outcry versus electronic trading. J Int Finan Mark Inst Money 8(3–4):243–260CrossRef

Schwarz G (1978) Estimating the dimension of a model. Ann Stat 6(2):461–464CrossRef

So RW, Tse Y (2004) Price discovery in the Hang Seng index markets: Index, futures and the tracker fund. J Futur Mark 24(9):887–907CrossRef

Tse Y, Bandyopadhyay P (2006) Multi-market trading in the Eurodollar futures market. Rev Quant Finan Account 26(3):321–341CrossRef

Tse Y, Erenburg G (2003) Competition for order flow, market quality, and price discovery in the Nasdaq 100 index tracking stock. J Finan Res 26(3):301–318CrossRef

Tse Y, Martinez V (2007) Price discovery and informational efficiency of international iShares funds. Glob Finan J 18(1):1–15CrossRef

Tse Y, Bandyopadhyay P, Shen YP (2006) Intraday price discovery in the DJIA index markets. J Bus Finan Account 33(9–10):1572–1585CrossRef

Upper C, Werner T (2002) Tail wags dog? Time-varying information shares in the Bund market. Economic Research Centre of the Deutsche Bundesbank, Discussion paper, 24/02

White H (1980) A heteroskedasticity-consistent covariance matrix and a direct test for heteroskedasticity. Econometrica 48:817–838CrossRef

Yan B, Zivot E (2003) Analysis of High-frequency financial data with S-plus. University of Washington, Working Paper

Title: The makings of an information leader: the intraday price discovery process for individual stocks in the DJIA
Authors: Marc W. Simpson
Jose F. Moreno
Teofilo Ozuna
Publication date: 01-04-2012
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 3/2012
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-011-0232-5

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 3/2012

Advertising intensity, investor recognition, and implied cost of capital

CEO stock options and analysts’ forecast accuracy and bias

CEO incentives and the cost of debt

Short and long-term interactions between venture capital returns and the macroeconomy: evidence for the United States

Investment opportunity set, political connection and business policies of private enterprises in China