Improving Information Leadership Share for Measuring Price Discovery

We propose an improvement to the information leadership (IL) measure of price discovery
as introduced in Yan and Zivot (2010), and the information leadership share (ILS) measure
proposed by Putnins (2013). Our improved IL and ILS measures integrate the price discovery
share (PDS) from Sultan and Zivot (2015) with the component share (CS) from Gonzalo and
Granger (1995). In contrast to the IL metric by Yan and Zivot (2010), which combines the
information share (IS) measure from Hasbrouck (1995) with CS, we demonstrate that our
improved IL measure accurately reflects the ratio of initial responses of competing markets to
a permanent shock, even when the residuals of reduced-form vector error correction models
are correlated. Simulation evidence strongly supports the superiority of our measures over a
wide spectrum of existing price discovery metrics (Lien and Shrestha, 2009; Putnins, 2013;
Sultan and Zivot, 2015; Patel et al., 2020). We demonstrate the effectiveness of our improved
measures by examining price discovery for various Chinese stocks cross-listed in Shanghai
and Hong Kong (SH-HK) both before and after the initiation of the Shanghai-Hong Kong
Stock Connect.