Price Discovery, Cross-listings and Exchange Rates: Evidence from Australia and New Zealand

This paper examines price discovery for four Australian stocks cross-listed in New Zealand and five New Zealand stocks cross-listed in Australia for the period January 2002 to December 2005. Estimating Hasbrouck (1995) information shares over time reveals that the importance of the Australian market is growing. However, when incorporating the AUD/NZD cross-rate into the model, we find that this growing importance disappears. The reason for this is that both the Australian and the New Zealand currencies are so-called “commodity currencies” and are therefore not exogenous with respect to stock prices. We find that the shift in price discovery can be explained by a shift in the relative role of both markets in the determination of the cross-rate. Implications of this study are that when studying similar countries, the exchange rate cannot be considered as an exogenous process.