International Cross-Listing: The Effects of Market Fragmentation and Information Flows

Abstract

We investigate the effects of market fragmentation and information flows in the case of stocks cross-listed on markets in Central Europe and London. First, we test for co-movement, interaction and error correction behavior between the local and London markets. Our results suggest that strong interactions exist between these markets, with the London market being slightly more important than the local one. The two prices of cross-listed stocks are cointegrated and pricing errors are corrected over a few days. These interactions suggest partial fragmentation. Second, we extend an earlier model to examine the impact of foreign listing on the variance of local returns. The focus of previous studies has concentrated almost exclusively on the return of cross-listed securities. The variance of returns has remained mostly unnoticed, even though some studies noted an increase of variance after the cross- listing. In our model, we introduce a new factor that influences return variance: tighter interaction with foreign markets as a consequence of cross-listing. Estimation results lend support to our model.cross-listing, information flow, order flow, return variance, market fragmentation