Price discovery and long-run trends in Pacific Rim dually listed securities

Abstract

This paper explores the long and short run relationships of securities cross-listed in the London market and in three Pacific Rim exchanges; Japan, Hong Kong, and Australia. The motivation for this is to determine the extent that the price discovery process exhibited between the London and Pacific markets help set new prices in each exchange and whether a natural bias exists in the domestic market being more responsible for setting prices. Johansen 's reduced rank cointegration tests between domestic and London prices plus the foreign exchange rate are applied to estimate the common long-memory components in these cointegrated systems to obtain the permanent and transitory components of pricing behaviour. Also, a principal component method is then utilized to determine the relative amount of price discovery contained in each market that can be deduced from the cointegrating vectors. Results show each system displays at least one long-memory component, illustrating prices quoted on different markets for these countries are financially linked (interdependent). Moreover, results indicate that price discovery for dual listed securities arise predominantly from their own home market.