Price Discovery in Europe

This paper studies the formation of stock prices for British, German and French stocks, simultaneously traded in London and Frankfurt or Paris. We analyze theoretically the case where investors and traders based in the same country as the ̄rm have better information on its value than foreign traders. Our model implies that prices set on the domestic market should be informationally more e±cient than prices set on the foreign market. Our empirical analysis, based on opening and closing prices for companies simultaneously traded on these exchanges, yields results consistent with the theory.