Working Paper: CEPR ID: DP2878
Authors: Bruno Biais; Isabelle Martinez
Abstract: This Paper studies the formation of opening prices for German and French stocks, simultaneously traded in Frankfurt and Paris. We analyse theoretically the case where investors and traders based in the same country as the firm have better information on its value than foreign traders. Our model implies that prices set on the domestic market should be informationally more e±cient than prices set on the foreign market. For German stocks, our empirical results are consistent with theory. The informational e±ciency of French stock prices is comparable in the two markets when the Frankfurt specialist can observe Paris preopening prices before opening the market.
Keywords: Information Asymmetries; International Financial Markets; Integration; Market Microstructure
JEL Codes: F12; F21; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic market prices (Frankfurt for German stocks) (G19) | Informational efficiency (G14) |
| Foreign market prices (Paris) (F16) | Informational efficiency (G14) |
| Local investors' superior information (G14) | Domestic market prices (Frankfurt for German stocks) (G19) |
| Local investors' superior information (G14) | Foreign market prices (Paris) (F16) |
| Price discrepancies (between domestic and foreign markets) (F31) | Informational efficiency (G14) |
| Frankfurt traders observe Paris pre-opening prices (G15) | Informational efficiency of French stocks (G14) |