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Abstract
This study tries to answer the following question: Should the US investors purchase American depository receipts (ADRs) issued by Taiwanese multinationals? The conditional international asset pricing model of Dumas and Solnik (Journal of Finance, 50, 445–79, 1995) is applied to price these Taiwanese American depository receipts (ADRs). Empirical results show that foreign exchange risk is priced in Taiwanese ADRs. Moreover, Taiwanese ADRs are shown to help US investors diversify their portfolios globally. These findings suggest that Taiwanese ADRs are valid investment tools for US investors who seek international diversifications.
Notes
The data are taken from Depository Receipts 2003 Half-Year Market Review, the Bank of New York.
One exception is for the 90-day commercial paper rates of Taiwan, which is obtained from the Taiwan Economic Journal Data Bank.
This contradicting result is in line with the observations by Dumas and Solnik (Citation1995): when tested in unconditional forms, the foreign exchange risk is not priced; when tested in conditional forms, that is, the coefficients are time-varying and represented by a vector of instruments and multiplied by a vector of constants, the foreign exchange risk is priced.