Housewives of Tokyo versus the Gnomes of Zurich,Measuring Price Discovery in Sequential Markets.pdfVIP

Housewives of Tokyo versus the Gnomes of Zurich: Measuring Price Discovery in Sequential Markets Jianxin Wang and Minxian Yang Australian School of Business University of New South Wales Sydney, Australia October 2008 Abstract This paper examines market-specific contributions to price discovery in sequential markets, where changes in the efficient price are embedded in the sequential price changes across markets defined by time zones. We propose a structural VAR model to identify market- specific shocks to the efficient price and to measure a market’s contribution to price discovery. The model is applied to the 24-hour trading of AUD, JPY, EUR, and GBP against USD over an eight-year sample period. We estimate the information shares, in the sense of Hasbrouck (1995), of four sequential markets around the world. We find that Europe remains highly significant for the pricing of all four exchange rates. Asia is gaining information shares in EUR and GBP but is losing information shares in AUD and JPY. Currency trading is still dominated by institutional investors in Europe and the United States. The price impact of the “housewives of Tokyo” may have been overstated. Key words: price discovery, information share, sequential markets, Beverage-Nelson decomposition, efficient price, variance ratio, foreign exchange rate. JEL classification: G14, G15, C32 We thank Douglas Foster, Frederick Harris, Joel Hasbrouck, S. Ghon Rhee, and Shuji Watanabe for helpful comments and the Securities Industry Research Centre of Asia-Pacific (SIRCA) for providing the foreign exchange data. Jianxin Wang is the corresponding author and his email is jx.wang@.au. Minxian Yang’s email is m.yang@.au. 1 “Years ago, it was the gnomes of Zurich who shook the foreign exchange markets. They have now been replaced by the housewives of Tokyo, who speculate in various currencies. However, whereas the gnomes of Zurich were accus