Price Discovery Between the New York Stock Exchange and Istanbul Stock Exchange

ABSTRACT

We study the price discovery process between the New York Stock Exchange (NYSE) and Istanbul Stock Exchange (ISE). We examine the only cross-listed stock in those exchanges, Turkcell, for the overlapping trading periods. Utilizing the information share (IS) and the common factor component (GG) approaches, we estimate the contribution of each market to the price discovery process. We find that each market has relatively close GG coefficients. IS estimates indicate that a significant portion of Turkcell’s price discovery occurs on the NYSE. The smaller share of price discovery on the ISE may be attributed to the discrete tick sizes in the ISE.

KEY WORDS:

• cross listing
• Istanbul Stock Exchange
• price discovery
• tick size

Notes

1. http://www.world-exchanges.org/files/files/1st%20half%20%202012%20WFE%20market%20highlights%20with%20comments.pdf.

2. Baillie et al. (2002), de Jong (2002), Lehmann (2002), and Yan and Zivot (2010) provide detailed discussions of both models. The main finding is that two models provide similar results when the residuals of the vector error correction model are uncorrelated between markets; however, if there is a correlation, results differ.

3. Olbrys (2013) also examines price and volatility spillover between the United States and two East European market indexes (Hungary and Poland) using multivariate EGARCH analysis. However, she disregards overlapping periods and focuses on open-to-close index returns.

4. Zhou et al. (2011) examine intraday price and volume interdependence between stocks and warrants of fifteen Chinese stocks.

5. We also repeat our analysis using best bid prices. Our results obtained using best bid prices are similar to results obtained by using best ask prices. Therefore, we report results obtained by using best ask prices and quote midpoint.

6. The overlapping period extends to two hours for the days in which the United States switches to daylight savings time but Turkey does not, which is for only a two-week period.

7. The ISE reduced tick sizes by half on November 1, 2010. Since the data set used in this study spans a period prior to this change, we cannot observe possible effects of this structural change.

8. For brevity, we only report IS estimates of the NYSE. GG estimates indicate a similar shift in price discovery behavior.

Additional information

Funding

This work was supported by Boğaziçi University Research Grant No. 5844 and Turkcell Academia.