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The linkage between the U.S. “fear index” and ADR premiums under non-frictionless stock markets

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  • Omar Esqueda
  • Yongli Luo
  • Dave Jackson

Abstract

This paper examines the effects of the U.S. investor sentiment on American depository receipts (ADR) premiums by using daily prices of Latin American ADRs from 1995 to 2009. The volatility index (VIX) is used as a proxy for investor expectations about the stock market. High levels in the VIX indicate that investors are fearful about future performance of the U.S. stock market. We estimate a GARCH-M in the framework of an ADR pricing model. We control for liquidity, transaction costs, and domestic and U.S. stock exchange returns. We find that deviations from the law of one price in ADRs can be partially explained by the lag of the smoothed volatility index. There is a structural break in the sample period before and after the enactment of the Sarbanes-Oxley Act. This paper has important implications for portfolio diversification on emerging economies as investment managers can improve hedging strategies by incorporating known values of the volatility index. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Omar Esqueda & Yongli Luo & Dave Jackson, 2015. "The linkage between the U.S. “fear index” and ADR premiums under non-frictionless stock markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(3), pages 541-556, July.
    • Handle: RePEc:spr:jecfin:v:39:y:2015:i:3:p:541-556
    DOI: 10.1007/s12197-013-9265-z
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    Cited by:

    1. Esqueda, Omar A. & Jackson, Dave O., 2015. "Cross-listing performance and insider ownership: The experience of U.S. investors," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 77-94.
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    7. John Griffith & Mohammad Najand & Jiancheng Shen, 2020. "Emotions in the Stock Market," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(1), pages 42-56, January.

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    More about this item

    Keywords

    American depository receipts; ADR premium; Latin America; VIX; Implied volatility; Investor sentiment; Law of one price; G14; G19;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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