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Journal of Financial Econometrics Advance Access published online on September 10, 2009
Journal of Financial Econometrics, doi:10.1093/jjfinec/nbp015
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© The Author 2009. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oupjournals.org

Price Discovery in Fragmented Markets

Frank De Jong
     Tilburg University

Peter C. Schotman
     Maastricht University

Address correspondence to Peter Schotman, Limburg Institute of Financial Economics (LIFE), Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands, or e-mail: P.Schotman{at}MaastrichtUniversity.NL.

JEL Classification: C32, F31


  Abstract

This paper proposes a structural time-series model for the intraday price dynamics on fragmented financial markets. We generalize the structural model of Hasbrouck (1993) to a multivariate setting. We discuss identification issues and propose a new measure for the contribution of each market to price discovery related to the Hasbrouck (1995) information shares. We apply the model to two sets of Nasdaq dealer quotes.

KEYWORDS: High-frequency data, microstructure, structural time-series models

We would like to thank Bart Frijns, Bruce Lehmann, and seminar participants at University of Amsterdam, Bilgi University (Istanbul), Stockholm School of Economics, University of Uppsala, and Sveriges Riksbanken for helpful comments on an earlier draft. As always, all errors are our own.

Received September 4, 2007; revised March 27, 2008; accepted July 31, 2009


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