ANNALS OF ECONOMICS AND FINANCE 2, 321–338 (2006) The Impact of Stock Exchange Rules on Volatility and Error Transmission — The Case of Frankfurt and Zurich Cross-Listed

This paper investigates the relationship between spillover effects and stock market regulations for a sample of cross-listed firms in Frankfurt+ and Zurich markets. Using La Porta et al.’s (1998) stock exchange regulatory classifica-tion we identify firms that have cross-listed on foreign exchanges with either tougher, weaker or similar accounting disclosure, bankruptcy and shareholder protection rules. We then use the GARCH approach suggested by Karolyi (1995) and Engle and Kroner (1995) to estimate volatility and error trans-mission for our sample of cross-listed equities, taking into account regulatory differences between exchanges. Our results show the differences in stock ex-change rules that can influence spillovers between foreign cross-listed equities and the respective market indices. Shareholder protection rules also seem to have less of an effect on cross-listed share volatility transmission than do differ-ences in accounting disclosure and bankruptcy protection rules. c © 2006 Peking University Pres