Information, Trading Volume, and International Stock Return Comovements: Evidence from Cross-Listed Stocks

Abstract

We investigate the joint dynamics of returns and trading volume of 556 foreign stocks cross-listed on U.S. markets. Heterogeneous-agent trading models rationalize how trading volume reflects the quality of traders' information signals and how it helps to disentangle whether returns are associated with portfolio-rebalancing trades or information-motivated trades. Based on these models, we hypothesize that returns in the home (U.S.) market on high-volume days are more likely to continue to spill over into the U.S. (home) market for those cross-listed stocks subject to the risk of greater informed trading. Our empirical evidence provides support for these predictions, which confirms the link between information, trading volume, and international stock return comovements that has eluded previous empirical investigations.

Does information vault Niagara Falls? Cross-listed trading in New York and Toronto

“…Thus, the traders on the TSX possess relatively more private information on Canadian cross-listed stocks than their counterparts on the NYSE. Looked at another way, this lends support to the consensus in the literature that home-market trades are more information-based than trades of their U.S. cross-listings (Eun and Sabherwal, 2003;Gagnon and Karolyi, 2009;Grammig et al, 2005). However, this may be partly due to the relatively relaxed prosecution of insider trading on the TSX (King and Segal, 2004).…”

Exchange trading rules, governance, and trading location of cross-listed stocks

“…If they are more correlated with US assets, then US investors might be more willing to invest in the non-US markets (by parity of reasoning to why the information share increases the amount of US trade). Supporting this, Gagnon and Karolyi (2009) find that volume 'spills over' from the US exchange to the non-US exchange on high-volume days. That is, as more information is disclosed in the US market, the level of non-US market also increases.…”

“…Exchanges that are based in jurisdictions with superior regulation and surveillance enjoy the benefit of more active trading (Cumming and Johan, 2008;Cumming, Johan and Li, 2011). For firms resident in jurisdictions that have inferior regulation or enforcement, there is a benefit to cross-listing in the U.S. to spur on trading activity (Halling et al, 2008;Gagnon and Karolyi, 2009). …”

Capital account reform and short- and long-run stock price leadership

“…How does one reconcile approaches like Gagnon and Karolyi's (2009), which focus on short-run effects, with a long-run equilibrium approach? Granger's (1988) discussion of the relationship between co-integration and causality offers a way forward in disentangling long-run co-integration and short-run predictability effects.…”

“…From a cross-pricing perspective, the error-11 . Through our assessment of these areas, we shed new light on the A-to H-pricing difference (see Wang and Jiang, 2004;Arquette et al, 2008;Ma et al 2010;and Cai et al, 2011) and on cross-listing price discovery in general (see Harris et al, 1995;Eun and Sabherwal, 2003;and Gagnon and Karolyi, 2009, 2010b. Also see Cai et al (2011, p. 2126 for brief review of Markov estimation approaches in relation to dual-traded securities.…”