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Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets

Published online by Cambridge University Press:  06 April 2009

Frederick H. deB. Harris ,
Thomas H. McInish ,
Gary L. Shoesmith  and
Robert A. Wood
Frederick H. deB. Harris
Affiliation:
Babcock Graduate School of Management, Wake Forest University, Winston-Salem, NC 21709
Thomas H. McInish
Affiliation:
Fogelman College of Business and Economics, Memphis State University, Memphis, TN 38152
Gary L. Shoesmith
Affiliation:
Babcock Graduate School of Management, Wake Forest University, Winston-Salem, NC 21709
Robert A. Wood
Affiliation:
Fogelman College of Business and Economics, Memphis State University, Memphis, TN 38152
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Abstract

Using synchronous transactions data for IBM from the New York, Pacific, and Midwest Stock Exchanges, we estimate an error correction model to investigate whether each of the exchanges is contributing to price discovery. Johansen's test yields two cointegrating vectors, which together verify the expected long-run equilibrium of equal prices across the three exchanges. Two error correction terms specified as the differences from IBM prices on the NYSE indicate that adjustments maintaining the long-run cointegration equilibrium take place on all three exchanges. That is, IBM prices on the NYSE adjust toward IBM prices on the Midwest and Pacific Exchanges, just as Midwest and Pacific prices adjust to the NYSE.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 30 , Issue 4 , December 1995 , pp. 563 - 579
Copyright
Copyright © School of Business Administration, University of Washington 1995

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