LOST IN TRANSLATION: WHICH STOCK PRICES BEAR THE BURDEN TO ADJUST TO EXCHANGE RATES?

We examine the role of competing exchanges to restore price parity following currency shocks during 2008, a year characterized by dramatic currency volatility. Burdens on the NYSE and home market to restore price parity for cross‐listed stocks are more dynamic than previously thought. Adjustments in NYSE prices are not uniform across stocks, are often less than home market adjustments, and are strongly influenced by differences in order execution quality. We quantify the effect of currency shocks using a three‐system error correction model, and show that currency shocks exert independent and profound effects as prices gravitate to restore price parity.