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Multi-market trading, price delay, and return predictability

Author

Listed:
  • Xia, Chuanxin
  • Yang, Nien-Tzu
  • Lin, Chaonan
  • Ko, Kuan-Cheng

Abstract

Based on a setting of multi-market trading that involves American Depositary Receipts (ADRs) and underlying equities, we develop measures of price delay to capture the return predictability for both ADRs and the underlying equity markets. We show that ADRs with the severest price delay in responding to underlying equities command a remarkably high premium. The price delay of underlying equity in responding to corresponding ADR returns also positively predicts future returns of the equity. We further document evidence that limits to arbitrage explain the price delay premia in both markets.

Suggested Citation

  • Xia, Chuanxin & Yang, Nien-Tzu & Lin, Chaonan & Ko, Kuan-Cheng, 2021. "Multi-market trading, price delay, and return predictability," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612320300295
    DOI: 10.1016/j.frl.2020.101730
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    More about this item

    Keywords

    Price delay; ADRs; Underlying equity; Return predictability; Arbitrage risk;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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