Round-the-Clock Price Discovery for Cross-Listed Stocks: US-Dutch Evidence

U.S. trading in non-U.S. stocks has grown dramatically. Round-the-clock, these stocks trade in the home market, in the U.S. market and, potentially, in both markets simultaneously. We use a state space model to study 24-hour price discovery. As opposed to the standard "variance ratio'' approach, this model deals naturally with (i) simultaneous quotes in an overlap, (ii) missing observations in a non-overlap, (iii) noise due to transitory microstructure effects, and (iv) contemporaneous correlation in returns due to market-wide factors. For NYSE-listed Dutch stocks, home market hours are a factor three more informative than U.S. market hours, which, in turn, are twice as informative as overnight hours. Surprisingly, strongest price discovery takes place in the NYSE preopening. The model shows results that are significantly different from the variance ratio approach.