Abstract
The purposes of this article are to reinvestigate how returns of major American depository receipts (ADRs) from different countries are related to the underlying stock returns and to identify the determinants of ADR risk premiums. We use different types of error-correcting terms in vector error correction models to examine information flows between ADRs and the underlying foreign stocks. General method of moments estimation of conditional international asset pricing model of Dumas and Solnik (Citation1995) is applied to investigate ADR return premiums. We find that stock returns are more affected by disequilibrium between ADR and stock prices in an inefficient way. For US investors, foreign exchange rate risk premiums and world market risk premium (beyond US index) are priced in ADRs returns ex ante. Surprisingly, it is shown that the exchange rate of New Taiwan dollar and the interest rates of Brazil and Taiwan play important roles in determining ADR risk premiums across countries.
Notes
1The depositary receipt market 2004 review. Bank of New York, 2005.
2The depositary receipt market 2004 review. Bank of New York, 2005.
3See Stapleton and Subrahmanyam (Citation1977).
4Because the similarity, we adapt the notations and descriptions from Wang and Yang (Citation2004) directly.