Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2015:4: A Factor Analytical Approach to Price Discovery

Joakim Westerlund (), Simon Reese () and Paresh Narayan ()
Additional contact information
Joakim Westerlund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Simon Reese: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Paresh Narayan: Centre for Research in Economics and Financial Econometrics, Deakin University

Abstract: Existing econometric approaches for studying price discovery presume that the number of markets are small, and their properties become suspect when this restriction is not met. They also require making identifying restrictions and are in many cases not suitable for statistical inference. The current paper takes these shortcomings as a starting point to develop a factor analytical approach that makes use of the cross-sectional variation of the data, yet is very user-friendly in that it does not involve any identifying restrictions or obstacles to inference.

Keywords: Price discovery; panel data; common factor models; cross-unit cointegration

JEL-codes: C12; C13; C33

35 pages, December 30, 2014

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