Price discovery in US-Canadian cross-listed shares
Given the increasing integration of markets around the world, concerns have been expressed about the survival of smaller national exchanges in competition with larger, more liquid exchanges. Several theories have been put forward regarding the likely long-term survival of smaller exchanges, but little actual empirical evidence has been presented to suggest which of the theories, if any, are correct. We explore this issue within the setting of Canadian and US firms cross-listing onto each other’s exchanges using the component share measure of each exchanges contribution to price discovery. We look at Gonzalo and Granger (1995) component shares over a 14 year period from 1996-2009 and find that each market is on average informationally dominant for its own companies, with the exception of Canadian firms listing on the NASDAQ. We also find that there is considerable time variation in the component shares, but little evidence that the Canadian market is systematically losing competitiveness to the US exchanges as has been feared. We also find that known determinants of the level of price discovery appear unrelated to the changes in price discovery.