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Information flows and the law of one price

Rui Fan, Oleksandr Talavera and Vu Tran
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Rui Fan: Swansea University
Vu Tran: University of Reading

Discussion Papers from Department of Economics, University of Birmingham

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 to prices of dual-listed stocks. Our sample includes 37 million Twitter messages mentioning the name of a UK-US cross-listed stock from 2015 to 2018. Using a high-frequency intraday data sample, we observe a negative (positive) link of volume (agreement). 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 for 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)
Pages: 38 pages
Date: 2022-03
New Economics Papers: this item is included in nep-big and nep-mst
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