How well does the weighted price contribution measure price discovery?

Wang, J; Yang, M

How well does the weighted price contribution measure price discovery?

Wang, J Yang, M

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Publication Type:: Journal Article
Citation:: Journal of Economic Dynamics and Control, 2015, 55 pp. 113 - 129
Issue Date:: 2015-06-01

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Field	Value	Language
dc.contributor.author	Wang, J	en_US
dc.contributor.author	Yang, M	en_US
dc.date.issued	2015-06-01	en_US
dc.identifier.citation	Journal of Economic Dynamics and Control, 2015, 55 pp. 113 - 129	en_US
dc.identifier.issn	0165-1889	en_US
dc.identifier.uri	http://hdl.handle.net/10453/39039
dc.description.abstract	© 2015 . The weighted price contribution (WPC) is a popular measure for price discovery. This paper examines the theoretical properties and empirical performance of the WPC in sequential markets. The benchmark used to judge the WPC is the information share (IS) measure based on the variation of the efficient price. We derive the asymptotic value of the WPC, which is a complex combination of the unconditional means and variances of the returns of sequential markets, under the assumption of normality. We show that the WPC correctly converges to the IS only when the returns are uncorrelated with zero means. Our theoretical predictions based on normality hold well in simulations and in empirical analyses of the overnight price discovery for the S&P 100 index and its constituent stocks. As the correlation between overnight and daytime returns increases, the WPC deviates from the IS substantially.	en_US
dc.relation.ispartof	Journal of Economic Dynamics and Control	en_US
dc.relation.isbasedon	10.1016/j.jedc.2015.04.002	en_US
dc.subject.classification	Economics	en_US
dc.title	How well does the weighted price contribution measure price discovery?	en_US
dc.type	Journal Article
utslib.citation.volume	55	en_US
utslib.for	1401 Economic Theory	en_US
utslib.for	1402 Applied Economics	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.publication-status	Published	en_US
pubs.volume	55	en_US

Abstract:

© 2015 . The weighted price contribution (WPC) is a popular measure for price discovery. This paper examines the theoretical properties and empirical performance of the WPC in sequential markets. The benchmark used to judge the WPC is the information share (IS) measure based on the variation of the efficient price. We derive the asymptotic value of the WPC, which is a complex combination of the unconditional means and variances of the returns of sequential markets, under the assumption of normality. We show that the WPC correctly converges to the IS only when the returns are uncorrelated with zero means. Our theoretical predictions based on normality hold well in simulations and in empirical analyses of the overnight price discovery for the S&P 100 index and its constituent stocks. As the correlation between overnight and daytime returns increases, the WPC deviates from the IS substantially.

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http://hdl.handle.net/10453/39039