Journal of Financial Markets 5 (2002) 277–308 Security price adjustment across exchanges: an investigation of common factor components for Dow stocks $ Frederick H. deB. Harris a, *, Thomas H. McInish b , Robert A. Wood b a Babcock Graduate School of Management, Worrell Professional Center, Wake Forest Drive, Wake Forest University, Winston-Salem, NC 27109, USA b Institute for the Study of Security Markets and Fogelman College of Business, University of Memphis, Memphis, TN 38152, USA Abstract VECMs can detect trades that permanently move the markets in cross-listed stocks. We employ Gonzalo and Granger’s (J. Business Econom. Stat. 13 (1995) 1) reduced-rank regressions and Q GG test statistic to analyze the common factor weight attributable to three informationally-linked exchanges for DJIA stocks over 1988–1995. We distinguish this error correction approach to trading price adjustment from the information shares approach to quote price leadership. In 1988, a 72.2% mean common factor weight (f NYSE ) approximated the NYSE’s 86% share of the trades. However, by 1992 f NYSE had declined precipitously for 27 Dow stocks, averaging only 49.6%, despite an unchanged 86% share of the trades. By 1995, the NYSE’s common factor weight had recovered, averaging 62.9% on 84% of the trades. We discuss three alternative microstructure-theoretic hypotheses that can confront this evidence. r 2002 Elsevier Science B.V. All rights reserved. JEL classification: G12 Keywords: Error correction; Common factor components; Price discovery $ This research was supported in part by the research grants program of the Babcock Graduate School of Management, Wake Forest University. We would like to thank the referee Frank de Jong, Bruce Lehmann, Jesus Gonzalo, Clive Granger, Joel Hasbrouck, James Shapiro, Yiuman Tse, Maureen O’Hara, Allan Kleidon, Tarun Chordia and participants at the May 2000 NBER Market Microstructure conference for their constructive comments and perceptive advice; the usual disclaimer applies. Jingwen Sun and Alex Wilson provided research assistance and invaluable computer systems analysis. *Corresponding author. Tel.: +1-336-758-5112; fax: +1-336-758-4514. 1386-4181/02/$-see front matter r 2002 Elsevier Science B.V. All rights reserved. PII:S1386-4181(01)00017-9