Information flows and the law of one price

Rui Fan, Oleksandr Talavera () and Vu Tran

International Review of Financial Analysis, 2023, vol. 85, issue C

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.

Keywords: Twitter; Investor sentiment; Exchange rate pass-through; Dual-listing; Market integration; Text classification; Computational linguistics (search for similar items in EconPapers)
JEL-codes: G12 G14 L86 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:85:y:2023:i:c:s1057521922004161

DOI: 10.1016/j.irfa.2022.102466

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