Price Discovery across the Rhine


International Review of Finance

March 2004, vol. 8, n°1, pp.49-74

Departments: Finance

We study opening prices set simultaneously for German and French stocks inFrankfurt and Paris. In our model investors and traders based in the samecountry as the firm have better information on its value than foreigntraders. Our theory implies that prices set on the domestic market differfrom (and are more informationally efficient than) prices set on the foreignmarket. Empirically, we find significant price discrepancies between homeand foreign prices, consistent with lack of integration of internationalfinancial markets. For German stocks, home prices are found to beinformationally more efficient than foreign prices. The informationalefficiency of French stock prices is comparable in the two markets whenFrankfurt traders can observe Paris preopening prices before the opening