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Understanding the ADR premium under market segmentation

Matthieu Stigler, Ajay Shah () and Ila Patnaik ()
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Matthieu Stigler: National Institute of Public Finance and Policy

Finance Working Papers from East Asian Bureau of Economic Research

Abstract: Capital controls can induce large and persistent deviations from the Law of One Price for cross-listed stocks in international capital markets. A considerable literature has explored firm-specific factors which influence ADR pricing when LOP is violated. In this paper, we examine the interlinkages between Indian ADR premiums and macroeconomic time-series. We construct an ADR premium index, whereby diversication across firms diminishes idiosyncratic fluctuations associated with each security. We find that the S&P 500 index and the domestic Nifty index influence the ADR Premium Index. Positive shocks to the ADR premium index precede higher purchases by foreign investors on the domestic market, and precede positive returns on the domestic index.

Keywords: capital market integration; depository receipts (search for similar items in EconPapers)
JEL-codes: F30 F36 G15 (search for similar items in EconPapers)
Date: 2010-01
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