Cross-border price discovery and a new motivation for cross-listing

We examine the location of price discovery, taking into account exchange rate dynamics, of POSCO stock on the KRX and the TSE, which have exactly identical trading hours. We analyze the information share which is defined as the relative contribution to the discovery of one price by the other price in a cointegrated time-series system of prices which share common stochastic trends. We estimate the information share using a vector error correction model (VECM) and the long-run impact matrix obtained in a vector moving average (VMA) representation of the VECM, as developed by Grammig, Melvin, and Schlag (2005). We find that price discovery of POSCO stock occurs mostly in the home market, the KRX, and the Korean won/Japanese yen exchange rate is exogenous with respect to POSCO stock prices on the KRX and the TSE. We also find that this result is robust regardless of the ordering of the prices in the Cholesky factorization. Given the reasons for POSCO's cross-listing on the TSE, our results shed new light concerning the motivation for cross-listing beyond the market segmentation hypothesis and bonding hypothesis.