An investigation of intraday price discovery in cross-listed

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1 C Ansoegui, A Bassiouny* and E Tooma An invesigaion of inraday price discovery in cross-lised emerging marke equiies An invesigaion of inraday price discovery in cross-lised emerging marke equiies ABSTRACT We invesigae muli-marke price discovery using wo year inraday daa for Egypian and Argeninean deposiory receips and heir underlying sock. The conribuion of he local versus inernaional exchange o price discovery is assessed using he Gonzalo and Granger s permanen-ransiory common facor model. Whereas price discovery in he local marke for Egypian equiies accouned for 75,8% of he price discovery in he, he resul was mixed for he Argeninean equiies, wih an average of only 41,67% of prices deermined in he local marke. We find ha size of he company, liquidiy and rading volume explain he conribuion of each marke. 1. INTRODUCTION * Price discovery, defined as he process of searching for an equilibrium price (Harris e al., 1995), is a key funcion of sock exchanges. Wih he pheonmenal increase in he number of companies cross lising heir socks on large inernaional exchanges in recen years, compeiion among exchanges for a larger proporion of rading has raised he quesion of wheher he locaion of price discovery remains local or shifs o he large inernaional marke. Recen evidence demonsraes ha alhough boh markes conribue o he price discovery process, he local marke is usually he dominan locaion of price discovery, wih a greaer proporion occuring in he foreign marke depending on he amoun of rading and how well he markes are informaionally linked. The main conribuion of his paper is o provide evidence abou he inraday price discovery of emerging marke socks ha are cross lised on inernaional exchanges as deposiory receips (s): US dollar (USD)-denominaed receips ha represen claims agains local-marke shares, during overlapping rading hours. Alhough emerging markes currenly dominae he marke for s (Global Finance, 2010), he lieraure is currenly lacking an inraday price discovery analysis ha evaluaes he share conribued o he process by he inernaional exchange, while examining is evoluion over ime. We herefore sudy his issue using Egypian and Argeninean socks ha are cross lised as Global s (Gs) and American s (As) on he London and US sock exchanges. Our sample is bes suied for our analysis because, unlike prior sudies, we compare s ha are foreign lised on wo inernaional exchanges during he same * Respecively Deparmen of Finance a ESADE Business School, Barcelona; Deparmen of Finance, American Universiy in Cairo and Briish Peroleum of Finance, American Universiy in Cairo. The auhors would like o hank Dr KarimAbadir and wo anonymous reviewers for valuable commens and suggesions. aliaa@aucegyp.edu period o allow cross-comparisons. Furhermore, we consider cross-lised equiies in local and inernaional marke wih differen rading hours bu a significan period of rading overlap. Finally, our price discovery analysis benefis from a large number of observaions because we use wo-year inraday ransacion daa for Egypian and Argeninean socks and heir s, as well as inraday foreign exchange daa for he USD o Egypian pound (EGP) and USD o Argeninean peso (ARS). We hypohesize ha, consisen wih previous sudies, price discovery should occur primarily in he local marke, especially given ha he markes we chose are informaionally segmened, due o language, culural, and rading barriers 1. Our mehodology follows hose of Ding e al. (1999) and Eun and Sabherwal (2003). We begin by verifying ha our sample of s and heir underlying socks are linked by inernaional arbirage condiions by conducing uni roo and co-inegraion ess. We follow wih our price discovery analysis by examining he conribuion of each marke o price discovery, relying on he permenan-ransiory (PT) common facor model of Gonzalo and Granger(1995). Finally we run panel regressions on our daa o ry o explain he conribuion of each marke o price discovery. Our resuls indicae ha whereas he local marke for Egypian securiies is he dominan marke for price discovery, he price for Argeninean securiies is deermined in boh he local and US sock markes, o he exen ha for some socks he local marke acs as a pure saellie o he inernaional exchange. We believe his evidence o be he firs of is kind in s and i corroboraes Eun and Sabherwal s (2003) resuls on dual-lised Canadian socks. We find ha liquidiy, rading volume and firms marke capializaion are all significan variables ha are dynamic, ha evolve over ime, and ha explain he share of price discovery. 1 Boh markes had large rading coss and shor-selling resricions during he sample period. Moreover, Argenina also has capial conrols. Invesmen Analyss Journal No

2 An invesigaion of inraday price discovery in cross-lised emerging marke equiies This paper is organized as follows. Secion 2 presens relaed lieraure. Secion 3 presens insiuional background, and Secion 4 presens our daa descripion and preliminary analysis. Mehodology and resuls are presened in Secion 5, and we conclude in Secion RELATED LITERATURE When securiies of he same company are raded in muliple venues during overlapping rading hours, heir prices should follow he same implici efficien price and are herefore linked by a common pricing facor. As prices in he differen markes reac o he arrival of new informaion, he quesion of where price discovery occurs for hose cross-lised securiies involves he measuremen of he magniude of reacion of each securiy o deviaions from he price pariy equilibrium. Two cornersone mehodologies in he lieraure are he basis of measuring price discovery: he Gonzalo and Granger (1995) permanen-ransiory (PT) common facor model and he Hasbrouck (1995) informaion share (IS) model. These mehods were firs applied o examine price discovery in US securiies ha rade on differen regional exchanges inside he USA. Harris e al. in heir sudies of IBM (1995) and Dow socks (2002) use he PT model and demonsrae ha ha all hree US regional exchanges conribue o price discovery. Hasbrouck (1995) examines he same quesion using he IS model and reaches similar resuls. Muli-marke price discovery sudies since hen have relied on eiher he PT or IS model o measure conribuion o price discovery. The general conclusion is ha boh mehodologies are relaed and give similar resuls in mos conexs, bu ha each is suiable in cerain conexs depending on he daa used and analysis objecive. (Baille e al., 2002) Sudying he conribuion of compeing sock exchanges in deermining price discovery becomes more moivaing for inernaional cross-lised socks ha rade in local and foreign markes during overlapping rading hours 2. Because price discovery is concerned wih adjusmens o prices due o crossmarke informaion flows, he marke wih more informaion on he securiy should conribue more o is price discovery. Assuming ha more informaion on he sock comes from is local marke, he hypohesis is, herefore, ha he local marke will be he dominan one and conribue more o price discovery han would he foreign marke, which will ac as a pure saellie (Garbade and Silber, 1979). 2 For sudies on price discovery during non-overlapping rading hours, see Agarwal e al. (2006) on Hong Kong Shares, Lieberman e al. (1996) and Qadan and Yigali (2011) on Israeli shares, Kadapakkam e al. (2003) on Indian shares, and Su & Chong (2007) on Chinese shares. Several sudies use eiher Gonzalo and Granger s PT or Hasbrouck s IS mehodology o es his hypohesis in various seings. The main obsacle o arriving a a general conclusion on he issue is he lack of qualiy of he inraday daa ha is required o operaionalize such models, so our knowledge is buil on various sudies ha invesigae he quesion in differen seings and imes. The general finding is ha boh markes conribue o price discovery, ha he local marke is generally dominan, and ha boh findings depend on he proporion of rading volume ha migraes o he inernaional exchange. We summarize he mos imporan sudies nex. Using ransacion prices for a Malaysian cross-lised sock, Ding e al. (1999) found ha he Kuala Lumpur Sock Exchange (KLSE) conribues more o price discovery han does he Singapore Sock Exchange (SSE). They explain his siuaion by he greaer rading volume for he sock in he local marke. In he Grammig e al. (2005) sudy of hree German socks and he Pascual e al. (2006) sudy of six Spanish socks cross lised as As on he NYSE, he local marke dominaed, even afer he researchers had conrolled for exchange rae shocks and rade-relaed shocks. The Lok and Kalev (2006) and Frijns e al. (2010) sudies of Ausralian and New Zealand crosslised socks also found ha, whereas price discovery occurs on boh markes, he local marke is he dominan one. The only research reporing mixed findings seems o be ha of Eun and Sabherwal (2003) on 62 Canadian US cross-lised securiies; in ha sudy, he foreign marke was found o be dominan for a number of socks. We can explain he difference beween he resuls of Eun and Sabherwal (2003) and hose of he previous sudies by he exen o which rading in he hos marke is liquidiy- raher han informaion-driven (Agarwal e al., 2007). US and Canadian markes are informaionally linked by virue of heir geographical proximiy and shared language; hus he US marke is an imporan one for Canadian companies and is more likely o play an influenial role in heir price discovery process. In he oher sudies cied here, language, culural, and geographical barriers may increase he probabiliy of he hos marke being more liquidiy driven han informaion-driven. Wheher his resul is rue for emerging marke socks ha lis on inernaional exchanges such as he USA or London is ye o be sudied, and such research is necessary in order o corroborae his hypohesis and explain he facors underlying he price discovery process. 3. INSTITUIONAL BACKGROUND Many emerging marke socks are raded on inernaional sock exchanges in he form of s, which are increasingly dominaing he cross-lising scene. We have seleced our sample of s wih underlying socks lised on he Egypian and 56 Invesmen Analyss Journal No

3 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Argeninean sock exchanges because of he similariies in boh emerging markes and because hey allow us o compare wo inernaional markes he London Sock Exchange and he US sock exchanges as he hos for cross lising. Alhough he Egypian and Argeninean sock exchanges are among he oldes sock markes in he world, daing back o 1883 and 1854, respecively, hey are boh relaively small sock exchanges 3 wih similar microsrucure. Boh are order-driven markes, wih an elecronic rading sysem for maching rades; hey have no axes on dividends or capial gains; and hey boh have large rading coss and shor-selling resricions. As in mos emerging marke sock exchanges, a relaively small se of companies dominaes he marke and rading value. In Egyp, he 30 mos heavily raded firms of he 221 lised in 2010 accoun for 34% of oal marke capializaion. The marke in Argenina is much hinner, wih he larges 10 companies comprising over 70% of marke capializaion. Egypian socks rade on he EGX during regular rading hours from 10:30 a.m. o 2:30 p.m. local Cairo ime; he normal rading week sars on Sunday and ends on Thursday. Egypian Gs rade on he LSE during regular rading hours from 8:00 a.m. o 4:30 p.m. local UK ime from Monday o Friday, giving he wo markes only four days each week, wih 4 overlapping rading hours daily. Argeninean socks rade on he Mercadoes de Valores de Buenos Aires (BCBA) from Monday o Friday from 11:00 am o 5:00 pm local Buenos Aires ime; he As rade during he same rading week on US exchanges from 9:30 am o 4:00 pm US Easern ime, giving boh markes 6 overlapping rading hours during winer and 5.5 hours during summer. Figure 1 shows he rading hours in each of our markes in GMT ime 4. Our main objecive in his sudy is o examine he share of price discovery on Egypian and Argeninean securiies in each of he local and foreign markes during he overlapping rading hours. 4. DATA AND PRELIMNARY ANALYSIS In his secion we sar by describing our daa and heir sources. We hen explain our inraday price maching procedure, which allows us o run our price discovery analysis during overlapping rading hours. 4.1 Daa sample and sources Our inraday ransacion daa consis of dae, ime, prices, and volumes for our sample of Egypian socks lised and heir Gs runs from 2 January 2008 o 14 March 2010 and Argeninean socks and heir As runs from 2 January 2008 unil 31 December We also obain inraday foreign exchange quoe daa for he EGP o USD exchange rae and he ARS o USD for he period. Our inraday rade daa and foreign exchange daa were obained wih he help of a senior Reuer s execuive from Thomson Reuers Tick Hisory Daabase, which provides prices wih a price resoluion of one cen or beer and a ime resoluion of 0,001 second. This provides us wih individual inraday daa of around 3,8 million observaions on he s and socks, as well Bid-Ask quoes for he EGP/USD exchange rae and observaions for he ARS/USD. A summary of all Egypian and Argeninean s cross lised inernaionally is presened in Table 1. Firs, he companies in our sample are among he bigges in heir local markes, comprising 30% and 61% of he oal Egypian and Argeninean marke capializaions, respecively. They also belong o he larges secors in heir economies. We can see ha for he majoriy of Egypian and Argeninean firms, he rading aciviy is much higher in he local marke. One key observaion involves he differences in value raded in he foreign marke across our sample. For companies such as Orascom Telecom (ORTE) in Egyp and Inversiones Y Represenaciones S.A. (IRS) in Argenina, we can observe ha mos of he value is rading in he foreign marke; for he ohers, he proporion of he value raded varies, wih companies such as Palm Hills having less han 10% of heir oal value rading on he foreign marke. Moreover, we can observe ha Argeninean securiies generally seem o be rading a a greaer aciviy level in he foreign marke han he Egypian ones. The proporion of value raded is a key variable, as we expec ha he greaer he value raded in he foreign marke, he larger he conribuion o price discovery. The inernaional rading aciviy varies hroughou he sample, however, and in line wih Eun and Sabherwal (2003), we pick securiies wih a minimum of 2000 observaions in eiher marke, leaving us wih 4 Egypian G-sock pairs and 9 Argeninean Asock pairs for our price discovery analysis. 3 By June 2011, he marke capializaion of he Egypian and Argeninean Sock Exchange was USD 67.1 billion and USD 59.9 billion, respecively. 4 I is imporan o noe ha dayligh saving (DST) does no occur a he same day of he year for each ciy, so we have periods in which one ciy sars and ends DST ahead of anoher. We do no exclude hose periods from analysis, bu adjus he overlapping hours accordingly during hose periods. Invesmen Analyss Journal No

4 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Summer GMT 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 London Cairo New York Beunos Aires Winer GMT 07:00 08:00 09:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 London Cairo New York Beunos Aires Figure 1: Trading hours in each of he markes in GMT ime Table 1: Summary of Egypian and Argeninean companies Company Ticker in Local Marke Bundling Raio Marke Cap (USD Million) Value Traded During Sample (USD Million) Number of Trading Days Average Price in Sample (USD) Sock Sock Sock Egyp Commercial Inernaional Bank/ Egyp (CIB) COMI 1: , ,22 551, ,16 10,27 EFG-Hermes HRHO 1: , ,81 201, ,34 13,04 Orascom Telecom Holding (OT) ORTE 1: , , , ,09 8,02 Orascom Consrucion Indusries (OCI) OCIC 1: , , , ,64 47,46 Telecom Egyp ETEL 1: , ,78 103, ,81 15,47 Palm Hills Developmen Company* PHDC 1:5 441, ,63 95, ,20 8,56 Lecico Egyp LECI 1:1 151,69 330,86 33, ,22 12,25 Suez Cemen SUCE 1: ,04 131,90 0, ,50 7,84 El Ezz Seel Rebars AEZD 1: , ,18 0, ,24 78,50 Argenina Banco Macro BMA 1: ,13 581,22 570, ,74 18,41 BBVA Banco Frances FRA 1: ,88 162,13 95, ,03 4,94 Edenor EDN 1:20 239,24 252,64 161, ,54 9,32 GrupoFinanciero Galicia GFG 1: ,89 369,51 190, ,29 4,20 Inversiones Y Represenaciones S,A, IRS 1:10 822,15 44,11 223, ,15 7,94 MeroGas MET 1:10 62,75 7,41 4, ,54 2,54 Transporadora de Gas del Sur TGS2 1:5 307,38 42,26 15, ,10 3,02 Alo Palermo S,A, SAM 1:4 706,01 2,62 1, ,56 8,57 Cresud CRES 1:10 831,15 48,14 359, ,38 11,73 YPF YPF 1: ,63 19,96 60, ,77 42,09 Noes: Table 1 presens a summary of all cross-lised sock in Egyp and Argenina, Bundling raio refers o he number of socks per issued on he company rading in he foreign marke, 4.2 Price maching The analysis of a cross-lised sock rading in wo markes can be based on eiher ransacion prices or quoed prices. Whereas quoe prices are preferred because hey do no suffer from he auocorrelaion presen in ransacion prices, hey are difficul o obain for emerging marke socks. Indeed, Ding e al. (1999) also relied on ransacion prices for heir inraday price discovery analysis on one Malaysian sock: Sime Darby Berhad and is dual-lised sock in Singapore. We believe ha he objecive of our analysis is no affeced by he use of ransacion prices because Eun and Sabherwal (2003) have shown ha he resuls do no differ qualiaively wih he use of eiher daa ype. Our analysis is based on he naural logarihm of he price series for he underlying socks afer convering i o USD, and he naural logarihm of he USD price of he s. This conversion faciliaes he specificaion of he error correcion erm in error correcion models, as well as he assessmen of equaliy of prices in he USA and our emerging markes. The challenge wih inraday ransacion daa is o mach he prices in boh markes. Because ransacion 58 Invesmen Analyss Journal No

5 An invesigaion of inraday price discovery in cross-lised emerging marke equiies daa do no occur a fixed ime inervals, we follow he minspan price-maching procedure of Harris e al. (1995), also used by Ding e al. (1999), in order o consruc he mached price vecors P S P * b, where FX P and P is he price of he in USD a ime ; and P is he foreign exchange adjused sock price, which is calculaed by combining he underlying sock price in he local currency P a ime, he USD o local currency exchange rae FX a ime, and he bundling raio b (he number of shares ha each represens). Our objecive is o mach and compare S P o P. Because in inraday daa our prices occur a differen insances of ime, we use he minspan maching algorihm in wo seps. (1) We firs creae a USD value of underlying share-denominaed value for he S P * b underlying share, P, by maching he share FX S price P and exchange raes FX in ime. (2) We hen mach Sep (1) wih he USD-denominaed deposiory receip price, P.For Sep (1), we adjus every rade on he local sock marke wih he exchange rae midquoe, calculaed as (ask + bid)/2, wih he closes ime o he price rade. For Sep (2), we mach he USDdenominaed value for he underlying sock P wih he price P wih a rade ha occurs closes in ime o he underlying sock rade. To mach he rades we look boh forward and backward in ime o he underlying sock rade P S and mach i wih he rade ha occurs wihin a minimum ime span. Table 2 presens some saisics of our inraday maching exercise. Our final sample yields mached observaions for Egypian -sock pairs and for Argeninean -sock pairs. The mean ime span beween he rades is 54 seconds in Egyp and 5 minues 58 seconds in Argenina. The maximum ime difference beween our mached rades can go as high as 1:05:12 in Egyp for HRHO and 3:04:50 in Argenina for TGS2. This long ime span beween mached rades reflecs he illiquidiy ha someimes occurs in he rading of emerging marke socks, so we decide o filer he mached observaions by limiing he ime span beween he socks o 15, 10, 5, and 1 minue. 5. METHODOLOGY AND RESULTS boh idenical securiies ha are fully fungible 5. This should ensure ha boh prices are equal; oherwise acive arbirageurs will inerfere o bring prices o pariy. Alhough emporary informaion asymmery and differenial co-movemens of he and is underlying socks o heir respecive markes may cause prices o deviae in he shor erm, he long-run equilibrium relaionship beween prices should cause hem o adjus oward pariy, as ensured by heir arbirage linkages. This heoreical pricing relaionship can be empirically esed by firs esablishing ha he and underlying sock price series are co-inegraed in he long run, and hen by showing ha any deviaion from his equilibrium in he shor erm is correced by an adjusmen in eiher one or boh of he price series. This laer es allows us o assess he relaive conribuion of each marke o price discovery by measuring he exen o which he price of he adjuss o a change in he price of he local socks and vice versa. We use he PT common facor model of Gonzalo and Granger (1995) ha relies on a common long-memory error-correcion esimaion approach o characerize he price discovery process and o deermine wheher boh markes do, in fac, conribue o price discovery. Our mehodology for examining price discovery is underaken hrough an analysis of he error-correcion mechanism beween he wo markes. A necessary precondiion of using he error correcion model is (1) o ensure ha whereas each price is non-saionary wih a uni roo, a linear combinaion of saionary prices exiss, and (2) ha here is a long-run coinegraion equaion ha links boh price series. Following hese preliminary ess for uni roos and coinegraion, we hen esimae he PT model. We finally close his secion wih a panel regression ha explains he relaive conribuion of markes o price discovery. 5.1 Uni roo es Following sandard mehodology in he lieraure, we use he Augmened Dickey and Fuller (ADF) approach o idenify wheher or no each of he Price P and foreign exchange adjused sock price P has a uni roo and hus non-saionary roo of I(1). We run he ADF es using hree regression variaions: (1) random walk, (2) random walk wih a drif, and (3) random walk wih a drif and ime rend. Resuls are presened in Table 3 and show ha all price series under he hree model variaions conain a uni roo, because we fail o rejec he null hypohesis a 5%. Besides heir locaion of rade and currency denominaion, he and he underlying sock are 5 Fungibiliy refers o he feaure by which deposiory receips are fully exchangeable o he underlying sock and vice versa. Invesmen Analyss Journal No

6 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Table 2: s and underlying sock price maching Company A. Toal Number of Observaions in Sample B. Number of Mached Trades C. MinSpan Descripive Sock S(all) S15 S10 S5 S1 Mean Span Max Span (min) (min) COMI :01:37 1:06:45 HRHO :01:06 1:20:38 ORTE :00:19 0:55:33 OCIC :00:34 0:57:53 Toal :00:54 1:05:12 BMA :01:09 1:18:34 FRA :02:05 1:17:52 EDN :02:05 1:57:19 GFG :01:07 1:26:37 IRS :05:19 4:00:42 MET :16:27 4:53:09 TGS :07:28 5:55:38 CRES :02:14 1:43:56 YPF :15:51 5:09:46 Toal :05:58 3:04:50 Noes: Table 2 Par A repors he number of iniial number of observaions of and underlying sock, In Par B of he able he final number of mached observaions resuling from he minspan price maching echnique is presened, Par C presens he average and maximum ime difference beween mached observaions, Table 3: Augmened Dickey Fuller es saisic Sock Model 1 Model 2 Model 3 Model 1 Model 2 Model 3 Egypian COMI -0,1514-1,3068-1,4960-0,1382-1,3259-1,5069 HRHO -1,1366-1,4249-0,8979-1,0455-1,3753-0,9469 ORTE -1,8113-2,1892-1,4757-1,8122-2,1854-1,4433 OCIC -0,8950-1,5654-1,2071-0,8781-1,5685-1,2054 Argeninean BMA 0,0645-0,9057-0,5465 0,0474-0,9718-0,6607 FRA -0,5149-1,4238-0,9374-0,5526-1,5855-1,2260 EDN -1,5807-1,4056-0,0697-1,4321-1,4384-0,2676 GFG -0,6901-1,2378-0,3154-0,6963-1,3551-0,6122 IRS -0,8316-1,1254 0,2035-0,7117-1,2309-0,3263 MET -1,1652-1,4440-1,6668-1,1855-1,8317-2,2744 TGS2-1,4473-1,9480-1,7243-1,2953-2,1532-2,2819 CRES -0,6248-1,5681-0,8404-0,5840-1,6857-1,1442 YPF -0,1080-1,2722-1,4048-0,0166-1,5058-1,6319 Noes: Table 3 presens he -saisic resuls of he ADF es on Equaions (1), (2), and (3), The 1% and 5% criical values aken from McKinnon (1991) for (1) are -2,566 and -1,941, for (2) are -3,433 and -2,863, and for (3) are -3,962 and -3,412, respecively, ** = significan a 1%; * = significan a 5%, 5.2 Co-inegraion We es for co-inegraion using wo approaches. In he firs approach, we direcly es for co-inegraion using he resul of he non-saionariy of prices and es wheher he price deviaion beween he mached and adjused underlying sock price P P is saionary using he ADF es saisic. In he second approach, we rely on he Johansen co-inegraion es for he null hypohesis ha henumber of co-inegraing vecors beween prices, r, is equal o 0. The resuls of he wo co-inegraion ess, presened in Table 4, show ha boh price series are indeed coinegraed. The ADF -saisic on he price deviaion is highly significan across all securiies, indicaing ha a saionary combinaion of prices exis. The Johansen es resuls rejec he null of no co-inegraing vecors in favour of one co-inegraing relaionship. The coefficiens of he es on boh price series rends are close and do no deviae from each oher. The Johansen es also repors he number of auoregressive lags using he Schwarz Bayesian crierion, which will be employed for he error correcion model esimaion o measure price discovery presened nex. 60 Invesmen Analyss Journal No

7 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Table 4: Co-inegraion ess A. ADF -saisic price deviaion Max eigenvalue Trace B.Johansen Tes Difference Egypian COMI -9,8413** 157,7116** 157,7324** -56, ,5927 0, HRHO -9,3495** 89,4481** 90,7216** -53, ,3178-0, ORTE -15,6323** 675,7053** 680,5967** -86, ,6204 0, OCIC -15,8655** 659,8906** 660,7205** -104, ,4417 0, Argeninean BMA -5,3437** 89,3907** 89,3959** -31, ,0584 0, FRA -6,3169** 116,2630** 116,5424** -24, ,7660 0, EDN -5,8131** 70,9474** 73,5971** -24, ,0880 0, GFG -5,2555** 117,6871** 118,1706** -21, ,9774 0, IRS -9,1391** 126,9036** 127,4741** -28, ,7955 0, MET -8,5651** 68,1118** 69,4894** -14, ,3215 0, TGS2-7,3758** 95,7763** 99,3699** -23, ,5145-0, CRES -7,3619** 118,2518** 118,6048** -30, ,6600 0, YPF -8,3520** 80,2769** 82,7442** -29, ,5029-0, Noes: Table 4 presens he co-inegraion es resuls, Par A presens he resuls of firs approach using he -saisic of he ADF es on he price deviaion series, Par B shows he Johansen es resuls beween wo price series, ** = significan a 1%; * = significan a 5%, BIC lags 5.3 The Gonzalo and Granger PT model for price discovery The wo mos esablished economeric models for esing he conribuion of price discovery in a mulimarke rading seing are he PT common facor model of Gonzalo and Granger (1995) and he Hasbrouck (1995) IS model. Boh models depend on he esimaion of a vecor error correcion model (VECM) of he and local sock prices. The difference is ha while he PT common facor model is ineresed in he amoun of adjusmen of a securiy rading in one marke o a deviaion in price from is counerpar rading in anoher marke (i.e. he coefficien of he co-inegraing equaion in he VECM), Hasbrouck s IS model is more concerned wih he variance of he error erm of he VECM by measuring he conribuion of a marke o price discovery as is relaive conribuion o he variance of he innovaions in he common rend. 6 We rely on he PT model o measure he relaive conribuion of he local and foreign marke o price discovery and believe i is mos suiable for our sample of cross-lised socks for a number of reasons. Firs, our sample of s from emerging marke do no rade wih he high frequency required for properly running he Hasbrouck mehod. Moreover, as discussed in Harris e al. (2002) and Eun and Sabherwal (2003), he informaion shares compued from he Hasbrouck mehodology rely on ordering prices, which resuls in non-unique informaion shares ha canno be used o run regressions on he resuls. Because our final 6 For furher discussion of he wo price discovery mehodologies please refer o he special ediion of Journal of Financial Markes (Issue 5, 2002) which was dedicaed o discuss he differences and meris of each approach (see for example DeJong (2002), Baille e al. (2002) and Harris e al. (2002)). objecive is o explain he difference in relaive conribuion of price discovery across our sample, he Gonzalo and Granger approach is he mos relevan. We esimae he following generalized vecor error correcion model, which includes he lagged changes of prices: l l i i i i i 1 i 1 (1) P (P P ) P P l l S ' S ' j j j j i 1 j 1 (2) P (P P ) P P The co-inegraing equaion (P 1 P 1 ) is esimaed wih he Johansen co-inegraion es above, where is normalized o 1. The coefficiens of main ineres in deermining he locaion of price discovery using Equaions (1) and (2) are and of he coinegraing equaion. They indicae he exen o which he price of one securiy will adjus o a deviaion from he pariy equilibrium. For example, if a price deviaion is observed whereas P P, pariy will be resored when eiher or boh he and sock price move o respond o he magniude of he deparure. Since he local marke is he home-marke of he sock, we can expec he price in he foreign marke o increase o close he gap, and herefore is expeced o be posiive. On he oher hand, since he foreign markes in-which he rades are usually large financial ceners we expec some feedback from he foreign marke o he local markes in which he local sock price will also adjus o he gap, which will be refleced in a significan and negaive. The larger and more significan he sign of alpha, he greaer he adjusmen of he price o a change occurring in he oher marke. Resuls of he model are presened in Table 5. Invesmen Analyss Journal No

8 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Table 5: Conribuion o price discovery α S -sa α -sa Y Egypian COMI -0,9851-0,0295* 2,5758 0,1387** -11, ,44% HRHO -0,9877-0,0617 1,5572 0,4211** -9, ,23% ORTE -1,0065-0,0238** 14,1060 0,0583** -23, ,02% OCIC -0,9983-0,0427** 14,2582 0,0712** -18, ,53% All Sample 75,80% Argeninean BMA -0,9527-0,0090** 10,6603 0,0060** -5, ,95% FRA -0,9518-0,0121** 9,7758 0,0141** -7, ,85% EDN -0,9761-0,0105** 6,7192 0,0156** -7, ,70% GFG -0,9515-0,0070** 10,6109 0,0118** -11, ,73% IRS -0,9856-0,0367** 11,9808 0,0111** -3, ,19% MET -0,9604-0,0440** 6,4837 0,0828** -6, ,32% TGS2-0,9966-0,0219** 6,7640 0,0383** -7, ,62% CRES -0,9650-0,0211** 12,4574 0,0015-0,7475 6,50% YPF -0,9915-0,0608** 9,6223 0,0006-0,0810 0,96% All Sample 41,76% Noes: Table 5presens resuls of Equaions (6) and (7), The normalized value of from he Johansen co-inegraion equaion is repored in he firs column wih he value of normalized o 1, The coefficiens of ineres are α and α S, showing he average adjusmen of he local (foreign) marke price o foreign (local) marke price, The numbers in brackes indicae -saisic values of he coefficiens, Y measures he reacion of Prices o he sock price esimaed as Y ** = significan 1%; * = significan a 5%, S ' The resuls are noeworhy. Firs, he coefficiens for price adjusmen are significan for 11 of he 13 securiies raded in he foreign marke as s. Thus, he prices of all he firms excep wo Argeninean s respond o deviaions from he local sock prices. The excepion we observe for Cresud and YPF can be aribued o he larger value being raded in he Unied Saes on he relaive o he local sock (Table 1). Second, for 12 of he 13 securiies rading in he local marke, is saisically significan,indicaing ha price discovery in general is wo ways and ha he local prices respond o deviaion from foreign prices. Thus, boh markes conribue o he price discovery process bu a varying degrees 7. In order o measure he share ha each marke conribues o price deerminaion, we use Eun and Sabherwal s (2003) measure of he reacion of he price o changes in he local sock price, esimaed as Y, where we can refer o Y as he Gonzalo and Granger common facor weigh (De Jong, 2002) and repor he values in he las column of Table 5. The larger he value of Y indicaes ha he foreign marke reacs more o movemens in he local price, and ha herefore i has a lower conribuion o he price discovery process. For example, approximaely 62% of he price of he of he Egypian company OCIC is deermined by movemens in he local marke making he local marke he dominan locaion for price discovery. Alhough here is large variaion across resuls, 75,6% of he Egypian prices, on average, are deermined in he local marke, signifying ha he foreign marke is only a saellie o he local marke. The resul for Argenina is differen, as i shows ha mos of he price deerminaion occurs on he US exchanges, wih only 41,67% of US prices deermined locally. We furher verify hese resuls hrough a Granger Causaliy es, presened in Table 6, confirming ha for 3 of he 4 Egypian socks, price discovery occurs boh ways, wih he local marke sill dominaing. The price of HRHO seems o be compleely deermined locally, given ha he coefficien on sock is no significan, as verified by he Granger causaliy es. For Argeninean socks, he local marke conribues more o price discovery in 5 of our 9 socks, ye i seems ha rading on US exchanges plays a dominan role in he process for some cases, such as BMA, CRES, and IRS. To he bes of our knowledge, his is he firs evidence of is kind in he lieraure, showing he inernaional hos marke playing he dominan role in price discovery of emerging marke equiies, and i warrans an in-deph analysis o ry o explain i. 7 For robusness we also measure price discovery using Hasbrouck informaion shares as well as run he VECM model while exogenzing he foreign exchange rae. Resuls were no qualiaively differen from he GG measures. 62 Invesmen Analyss Journal No

9 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Table 6: Resuls for Granger causaliy es Egypian COMI HRHO ORTE OCIC Argeninean BMA FRA EDN GFG IRS MET TGS2 CRES YPF F-Saisic STOCK does no Granger Cause 165,2370** does no Granger Cause STOCK 6,9541** STOCK does no Granger Cause 106,4420** does no Granger Cause STOCK 2,2506 STOCK does no Granger Cause 894,5500** does no Granger Cause STOCK 185,5520** STOCK does no Granger Cause 545,5330** does no Granger Cause STOCK 369,6820** STOCK does no Granger Cause 121,3590** does no Granger Cause STOCK 376,6610** STOCK does no Granger Cause 73,2342** does no Granger Cause STOCK 228,8360** STOCK does no Granger Cause 103,0240** does no Granger Cause STOCK 129,0770** STOCK does no Granger Cause 118,1190** does no Granger Cause STOCK 228,6230** STOCK does no Granger Cause 5,0165** does no Granger Cause STOCK 169,0360** STOCK does no Granger Cause 30,6400** does no Granger Cause STOCK 33,0729** STOCK does no Granger Cause 46,7084** does no Granger Cause STOCK 66,5138** STOCK does no Granger Cause 10,6519** does no Granger Cause STOCK 144,2380** STOCK does no Granger Cause 0,9624 does no Granger Cause STOCK 96,8847** Noes: Table 6presens resuls of Granger Causaliy ess of Reacion o Sock Price and vice versa, ** = significan a 1%; * = significan a 5%, 5.4 Explaining he conribuion o price discovery In his secion, we ry o explain he facors ha affec he conribuion o price discovery. Because we have wo years of inraday daa for our securiies, we measure he evoluion of he reacion of he foreign marke price o local price Y over ime, providing us wih a larger number of observaions han would be he case for a regular cross-secional regression analysis. We divide our oal sample ino four six-monh subsamples firs half of 2008, second half of 2008, firs half of 2009, and second half of 2009 and esimae he error correcion model parameers under each. The average reacions of he prices o sock price Y p (where p refers o sub-period) across he various sub-samples are shown in Figure 2. One could hypohesize ha due o he financial crisis, local sock price reacions o he volaile movemens on he inernaional exchanges in he USA and London would cause an increase in he share of price discovery in he foreign marke and herefore a decrease in he reacion o local marke Y. This hypohesis is conrary o our finding, as here was an increase in he reacion of he foreign marke o local prices during our second period he second half of 2008, which includes he financial crisis. During he financial crisis, prices deviaed grealy, creaing arbirage opporuniies ha required acive arbirageurs o inervene o bring prices o pariy; hus arbirage rades on he sock, and he may be a plausible reason for local marke dominaion of he price discovery process during ha period (Ansoegui e al., 2013). Invesmen Analyss Journal No

10 Price reacion (USD) An invesigaion of inraday price discovery in cross-lised emerging marke equiies H1_08 H2_08 H1_09 H2_09 Egypian Argeninean Figure 2: Reacion of prices in foreign marke o local price over ime We aemp o explain he difference in he dominance of he local versus foreign marke in price discovery across he sample and across ime by idenifying differen explanaory and conrol variables ha are hypohesized o affec he locaion of price discovery and using he common facor weigh Y as our dependen variable. Firs of all, as Chan e al. (2008) show, here is a srong relaionship beween liquidiy and cross-lising. We herefore hypohesize ha he lower he liquidiy on he foreign marke relaive o he local marke, he higher will be he reacion o local sock price movemens, since he more illiquid he rading of a securiy on a cerain marke, he lower is he level of informaiveness of is rading making i more reacive o movemens in he more liquid marke (Hasbrouck, 1995). We will employ several measures o proxy for liquidiy including rading volume (Eun and Saberwal, 2003), bid-ask spread (Frijns e al., 2010) and he Amihud (2002) measure of illiquidiy. Second, he volailiy of he of he relaive o is underlying sock can influence he locaion of rading since previous sudies documen a preference by invesors o inves in socks wih lower volailiy (Falkensein, 1996). Therefore, invesors will choose o rade in he securiy wih he leas volailiy, making ha marke faser in incorporaing informaion abou prices. We use he volailiy of reurns of he relaive o he underlying sock each period o proxy for volailiy. 8 8 We would like o hank an anonymous referee for poining ha ou. Finally, he heerogeneousness amongs he firms and markes in our sample requires ha we employ a number of conrols variables. We conrol for he inernaional exchange in which he securiy is crosslised o accoun for he differences in efficiency beween he US exchanges and he LSE as hos marke for inernaional cross-lising. Anoher imporan variable o conrol for is he size of he firm. While Eun and Sabherwal (2003) find ha he share of price discovery in he foreign marke increases as he company size decreases, Frijns e al. (2010) find ha he share increases as company size increases. We seek o corroborae hese mixed findings in our sample. Finally, we use he number of year since a company is cross-lised as our las conrol variable, wih he hypohesis ha he longer he duraion, he greaer is he informaiveness of he foreign marke in pricing and hus is conribuion o price discovery. We run a panel regression on various explanaory variables, conrolling for firm-specific fixed effecs in line wih Frijns e al. (2010) by running various models specificaions o explain he reacion of he price Y p. The firs model specificaion we run akes he following form: Y TV Spread Cap p,i 0 1 p,i 2 p,i 3 p,i Exchange... (3) 4 p,i p,i where TV refers o he Relaive USD rading volume (defined as he raio of USD rading volume of he relaive o he local sock over each six-monh period), 64 Invesmen Analyss Journal No

11 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Spread refers o he Spread Raio (defined as he raio of Average Bid-Ask Spread of o Average Bid-Ask Spread of Local Sock over each six-monh period), Cap is defined as he logarihm of he marke capializaion of he company a he end of each sixmonh period as well as he dummy variable for inernaional exchange,exchange, (where Egypian sock cross-lised on he LSE akes value of one and Argeninean firms cross-lised on US exchanges ake a value of zero). We hen add a number of oher variables o his iniial model specificaion including volailiy VOL (defined as he relaive reurn volailiy of he o local sock for every six-monh period), number of years since cross-lising (YEARS) as well as he Amihud (2002) measure of illiquidiy 9 (defined as he relaive illiquidiy of he o local sock price for every six monh period). Resuls are presened in Table 7. Our regression firs model specificaion has an overall significance and explains 54,88% of he variaion in he raio of price discovery adjusmen. All our explanaory variables are saisically significan. USD rading volume is negaively correlaed wih price adjusmen: he greaer he USD rading volume, he lower he reacion of price o local prices, a finding ha is consisen wih resuls from prior sudies (Eun and Sabherwal, 2003; Frijns e al., 2010). The spread raio, is also significan and demonsraes ha he larger he spread raio in he, he lower he liquidiy, and hus he higher is adjusmen o local prices. The marke capializaion variable is also significan, indicaing ha he larger he marke capializaion of he company, he greaer he significance of he local marke in price discovery. The exchange dummy is significan a he 5% level, which can be inerpreed as indicaing a higher overall level of efficiency of he US exchanges as hoss for inernaional cross-lising relaive o he LSE. Adding more explanaory variables for price discovery such as volailiy, number of rading days and he Amihud illiquidiy measure show only sligh improvemens in he overall significance of he model and are insignifican. This can be aribued o he high degree of correlaion amongs hose variables relaive o he ones in he iniial specificaion. 9 Where he measure for he is defined as Amihud i,c, D dr 1 Ri,d D Vol wih i corresponding o he securiy, c d 1 dr i,d he counry ha i belongs o, d he rading day each period, D refers o oal number of rading days in each six monh period, R refers o reurn on day d and Vol refers o he USD raded volume on he securiy on day d. The measure for he local sock Amihud is defined similarly and used he USD adjused sock i,c, price as is basis. 6. CONCLUSIONS In his paper, we sudy price discovery for Egypian and Argeninean socks ha are cross lised as s on he London and US exchanges. Our analysis conribues o he lieraure in a number of ways. No only do we presen wha appears o be he firs analysis of inraday price discovery of emerging marke socks ha are cross lised on inernaional exchanges, bu we do so for wo inernaional markes serving as he hos foreign marke during he same period. Moreover, we sudy price discovery in markes wih a much greaer overlap in rading hours han has ypically been considered, and we sudy hem for a longer period (wo years). Our resuls show ha, in line wih previous research (Ding e al., 1999; Grammig e al., 2005; Pascual e al.; 2006; Lok and Kalev, 2006 and Frijns e al., 2010), here is a clear dominance in erms of inraday price discovery for he Egypian socks cross lised in London. In he case of Argenina, however, we find ha he US marke plays a large and someimes dominan role in price discovery, o he exen ha for some socks he local marke acs as a pure saellie. We ry o explain he differences across he securiies in he share of he foreign marke o price discovery hrough a panel regression. Our regression resuls indicae ha he role of he foreign marke in price deerminaion flucuaes as a funcion of he liquidiy, size of company and marke efficiency. I seems, herefore, ha hose rading variables are reflecive of he direcion of informaion flow beween markes, and ha hey deermine he informaional linkage of he markes. This is refleced in he resul from he larger conribuion of he foreign marke o price discovery in Argeninean securiies relaive o Egypian securiies. This migh reflec he much hinner rading on he BCBA relaive o he rading on he EGX. I can also reflec he differences in informaion linkages beween he foreign and local marke for Argeninean and Egypian firms. While he decision by Argeninean firms o cross-lis migh be o srenghen already esablished economic links wih he US, he incenive for Egypian firms migh be more geared owards avoiding local poliical and legal regimes (as eviden by he uprising in Egyp in January 2011) raher han esablish sronger business ies. Our resuls conribue o a growing ineres among scholars in undersanding he impac of cross lising on securiy rading mechanisms. Fuure research should underake an in-deph sudy of he reasons for he migraion of rading beween markes. Invesmen Analyss Journal No

12 An invesigaion of inraday price discovery in cross-lised emerging marke equiies Table 7: Resuls for regression analysis (1) (2) (3) (4) Spread Raio 0,0074** 0,0067** 0,0068** 0,0072** (2,65) (2,86) (2,84) (2,00) Relaive Trading Value -0,0448** -0,0421** -0,0419** -0,0428** (-6,86) (-5,85) (-5,91) (-5,48) Marke Capializaion 0,0243** 0,0192** 0,0199** 0,0196** (9,22) (3,99) (3,98) (3,72) Exchange 0,1462* 0,1741* 0,1496* 0,1490* (1,99) (2,46) (2,09) (2,12) Volailiy 0,0590 0,0504 0,0440 (1,48) (1,18) (0,93) Amihud Measure 0,0009 0,0008 (1,71) (1,13) Years 0,0017 R-squared 54,88% 56,26% 57,02% 57,09% Noes: Table 7 summarizes he resuls of a panel regression, ** = significan a 1%; * = significan a 5%, (0,21) REFERENCES Agarwal S, Liu C, Ghon Rhee S Where does price discovery occur for socks raded in muliple markes? Evidence from Hong Kong and London. Journal of Inernaional Money and Finance, 26: Amihud, Y Illiquidiy and sock reurns: cross secion and ime series effecs. Journal of Financial Markes,5: Ansoegui, C., Bassiouny, A., &Tooma, E The proof is in he pudding: Arbirage is possible in limied emerging markes. Journal of Inernaional Financial Markes, Insiuions and Money, 23, Baille, Richard, G. Geoffrey Booh, YiumanTse and Tayana Zaboina, 2002.Price discovery and common facor models. Journal of Financial Markes, 5: Chan, J.S.P., Hong, D., Subrahmanyam, M.G A ale of wo prices: Liquidiy and asse prices in muliple markes. Journal of Banking & Finance, 32: De Jong F Measures of conribuions o price discovery: A comparison. Journal of Financial Markes, 5: Ding D, Harris F H deb, Lau S T, McInish T An invesigaion of price discovery in informaionally-linked markes: Equiy rading in Malaysia and Singapore. Journal of Mulinaional Financial Managemen, 9: Eun C S, Sabherwal S Cross-border lisings and price discovery: Evidence from U.S.-lised Canadian Socks. Journal of Finance,58: Falkensein E., 1996, Preferences for sock characerisics as revealed by muual fund porfolio holdings. Journal of Finance, 51: Frijns B, Gilber A, Tourani-Rad A The dynamics of price discovery for cross-lised shares: Evidence from Ausralia and New Zealand. Journal of Banking & Finance, 34: Garbade K D, Silber W L Srucural organizaion of secondary markes: Clearing frequency, dealer aciviy and liquidiy risk. Journal of Finance, 34: Global Finance rading ses record in firs half as BRIC counries raise mos capial. Sep 2010; 24, 8. Gonzalo J, Granger C W J Esimaion of common long-memory componens in coinegraed sysems. Journal of Business and Economic Saisics, 13: 1-9. Grammig J, Melvin M, Schlag C Inernaionally cross-lised sock prices during overlapping rading 66 Invesmen Analyss Journal No

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