Interactions between markets and dually listed stocks: The case of the Czech republic

This paper considers the interaction among equity markets in the Czech Repu blic and those in developed countries. Also considered are cross-listed sec urities traded in the Czech Republic whose global depository receipts (GDRs ) are listed in London. The models used include Granger causality, cointegr ation, and error-correction models. The results demonstrate that the Czech market is indeed affected by the development of major international equity indices. This, however, explains little of domestic market variability, so other factors related to stock market development need to be explicated. Th e prices of cross-listed securities on the domestic and London markets are cointegrated and an error-correction mechanism exists that corrects random deviations from the parity. As this error-correction mechanism appears to b e rather symmetric, and as the Granger causality tests suggest different ca usality patterns for individual stocks, none of the two markets emerges as the dominant one. A variety of interactions exist between the local and Lon don GDR markets.