Housewives of Tokyo versus the gnomes of Zurich: Measuring price discovery in sequential markets

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Journal Article
Journal of Financial Markets, 2011, 14 (1), pp. 82 - 108
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This paper presents two methods to measure market-specific contributions to price discovery in non-overlapping sequential markets: one is a non-parametric approach using high-frequency data and the other is a structural VAR model based on open-to-close returns. The methods complement the existing methodologies for comparing price discovery in parallel markets. Using these methods, we estimate the information shares of four sequential markets for the trading of AUD, JPY, EUR, and GBP against USD over an eight-year period. We find that price discovery in the foreign exchange markets are still dominated by Europe and the United States, particularly the London-New York overlapping trading hours. Asia is losing information shares to Europe in the trading of AUD and JPY. The significance of the "housewives of Tokyo" in currency trading may have been overstated. © 2010.
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