Market Quality around Macroeconomic News Announcements: Evidence from the US and Canadian Markets

We investigate changes in market quality in the United States and Canada during macroeconomic news announcements. We measure market quality in terms of the cost of trading, pricing errors, and returns dependence. Using a sample of cross-listed stocks and stock index futures, we provide robust evidence that market quality is higher in the United States than in Canada. We observe that, around announcement periods, transaction costs increase more in Canada than in the United States, suggesting that the US market offers better liquidity. More information is also incorporated into the US market. The pattern of intraday serial dependence in returns reveals that it takes investors about five minutes less to react to order imbalances in the United States than in Canada. The differences between the US and Canadian results using index futures are generally more significant than those based on cross-listed stocks, indicating that index futures are better than stocks at providing market-wide information.