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An Investigation on Information Transmission Between Stocks of Far Eastern Countries and Their American Depositary Receipts

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  • Junming Hsu
  • Li-Hwei Tsai

Abstract

Domestic stocks and their American depositary receipts (ADRs) are essentially twin securities listed in the home country and United States, respectively. Accounting for exchange rates and market friction, their prices should move in tandem if international markets are efficient. In reality, however, their returns are close but sometimes differ dramatically. This study hypothesizes that changes in trading volume and macro events can lead investors between two equity markets to generate heterogeneous expectations or interpretations, causing returns on one security to deviate from those on the other. The results show that changes in past domestic volume do affect current ADR returns, implying that volume contains additional information not in prices. It is also found that important macro events, especially bad news, trigger significant differences in returns between domestic shares and their ADRs. These results support our argument that heterogeneous expectations prolong price information transmission between two equity markets.

Suggested Citation

  • Junming Hsu & Li-Hwei Tsai, 2008. "An Investigation on Information Transmission Between Stocks of Far Eastern Countries and Their American Depositary Receipts," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(4), pages 40-61, July.
    • Handle: RePEc:mes:emfitr:v:44:y:2008:i:4:p:40-61
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    Cited by:

    1. Bhattacharjee, Kaushik & Bang, Nupur Pavan & Mamidanna, Sravya, 2014. "Transmission of pricing information between level III ADRs and their underlying domestic stocks: Empirical evidence from India," Journal of Multinational Financial Management, Elsevier, vol. 24(C), pages 43-59.
    2. Wu, Qinqin & Hao, Ying & Lu, Jing, 2017. "Investor sentiment, idiosyncratic risk, and mispricing of American Depository Receipt," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 1-14.

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