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Evidence of a Leadership Role in the Chilean Stock Exchanges

In our study of the two leading stock exchanges in Chile - the Santiago Stock Exchange (SSE) and the Electronic Stock Exchange (ESE) - we find that the SSE exhibits a leadership role over the ESE in terms of transmission of returns and volatility. These results indicate that prior empirical studies showing that the New York Stock Exchange leads other exchanges is a result of market structure factors rather than a "US effect". The factors that lead to a leadership role are deeper liquidity, more effective monitoring, and a greater concentration of speculators. Markets possessing these factors will be the first to attract investors and will lead other exchanges. Although the leadership role of the SSE creates a predictable flow of information between markets, the ability to create arbitrage opportunities is mitigated by transaction costs and the current order processing mechanism in Chile. However, our results suggest that a market's leadership could result in arbitrage opportunities in countries with lower transaction costs or different order-processing mechanisms.