Asynchronous ADRs: overnight vs intraday returns and trading strategies

Jamie Kang and Tim Leung

Studies in Economics and Finance, 2017, vol. 34, issue 4, 580-596

Abstract: Purpose - The purpose of this study is to analyze the overnight and intraday returns of the most traded American Depositary Receipts (ADRs) of Asian companies, understand the different levels of volatilities realized in these asynchronous markets and develop trading strategies based on empirical findings. Design/methodology/approach - This study presents an empirical analysis on the overnight and intraday returns of Asian ADRs. The authors propose a measure to quantify the relative contributions of the intraday and overnight returns to the ADR's total volatility. Furthermore, the return difference between S&P500 index and each ADR is fitted to an Ornstein–Uhlenbeck model via maximum-likelihood estimation. Findings - This study finds that ADRs' overnight returns are more volatile, whereas the intraday returns are significantly more strongly correlated with the US market returns. The return spreads between the S&P500 and ADRs are found to be a mean-reverting time series and motivate a pairs trading strategy. Research limitations/implications - The methodology used in this study is not limited to Asian ADRs and can be adapted to analyze the overnight and intraday returns of other non-Asian ADRs and stocks. Practical implications - Investors should be aware of the overnight price fluctuations while intraday traders may consider strategies that capture the mean-reverting return spread between an ADR (or an Exchange-Traded Funds [ETF] of Asian stocks) and the S&P500 index ETF (SPY). Social implications - ADRs are among the most popular securities for investing in foreign (non-US) companies. The total global investments in ADRs are estimated to be close to US$1tn. Understanding the risks of ADRs is important to not only individual/institutional investors but also regulators. Originality/value - This study provides a new measure to quantify and compare the relative contributions of volatility by overnight and intraday returns. Optimized pairs trading strategies involving ADRs and ETFs are developed and backtested.

Keywords: ADR; Intraday return; Mean-reverting; Ornstein–Uhlenbeck model; Overnight return; Pairs trading; C10; G11; G15 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
Working Paper: Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-10-2016-0254

DOI: 10.1108/SEF-10-2016-0254

Access Statistics for this article

Studies in Economics and Finance is currently edited by Prof Niklas Wagner

More articles in Studies in Economics and Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().