Price and Variance Transmission in ADRs: Evidence from 1990 to 1994

Abstract

The ADR pricing and variance were examined under the hypothesis of multi-prices and multi-variances effects. The model implemented was a multivariate EGARCH(1,1), where the U.S. and foreign conditional variances were included in the ADR conditional variance; also in the ADR conditional mean the U.S. and foreign returns were considered as explanatory variables. The results validate the theoretical model proposed by Alexander, Eun and Janakiramanan (1987), where the dual-listed security pricing depends upon the correlation between the ADR and the two markets where the security is traded. The model presents significant results in thirty four ADRs where their pricing and variance are explained by the U.S. and the foreign returns, at the same time, over a total of seventy-nine dual-listed securities. In particular, the conditional variance of the ADRs is significantly affected by the U.S. conditional variance in sixty-four cases, the foreign conditional variance is significant in sixty-two ADRs, where the combined effect of the U.S. and foreign conditional variance is significant on fifty-two occasions. The explanatory power of the U.S. return in the ADR pricing is significant in fifty-one cases, and the foreign return is significant in seventy-two cases. The combined effect from the U.S. and foreign returns is significant on forty-seven cases.