Information flows and the law of one price

Rui Fan, Oleksandr Talavera*, Vu Tran

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper explores the role of information flows for the law of one price in an almost frictionless environment. Specifically, we examine whether the volume and content of social media messages are related to the exchange rate pass-through (ERPT) to prices of dual-listed stocks. Our sample includes 37 million tweets mentioning the name of a stock cross-listed in the United Kingdom (UK) and the United States (US) from 2015 to 2018. Using a high-frequency intraday data sample, we observe a negative (positive) link between the ERPT and volume (agreement) of tweets. The findings suggest that large information flows and a high degree of disagreement add extra frictions for the law of one price. In addition, there is an asymmetric pattern of the pass-through, notwithstanding that there are no import/export or geographically-related frictions. This presents further evidence of the importance of information flows in understanding the law of one price.

Original languageEnglish
Article number102466
Number of pages11
JournalInternational Review of Financial Analysis
Volume85
Early online date17 Dec 2022
DOIs
Publication statusPublished - Jan 2023

Bibliographical note

Publisher Copyright:
© 2022 The Authors

Keywords

  • Computational linguistics
  • Dual-listing
  • Exchange rate pass-through
  • Investor sentiment
  • Market integration
  • Text classification
  • Twitter

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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