Relative volatility of ADR/GDR and underlying stock

Abstract

Abstract Depositary Receipts have emerged as a favored vehicle to access developed stock markets for many emerging market companies. India has been no exception. While several Indian companies have issued ADRs in the 1990’s only a few of these securities are listed in Us of Indian origin. We find that the underlying stock returns, exchange rate and market indies in the US and India together often explain less than half of the movement in ADR returns. Indian ADRs often enjoy large premiums, indicating effective market segmentation between the two countries. American Depository Receipts are instruments issued in the United Stated in lieu of a non- US company’s shares. They are tradable in the USA (or in another country though usually the term Global Depository Receipt (GDR)) is used for Depository Receipts outside the (USA) though the company itself not listed in a US exchange. Depository Receipts thus provide companies in emerging economies with a way of tapping industrialized markets particularly the United States market for equity capital arguably the least expensive way to make a company’s equity available to foreign investors. The 1990s witnessed an explosion in the number of ADRs issued and the amount of capital raised by companies mostly from developing countries. This employs ARIMA and GARCH model to model the stock returns and volatility underlying the stock returns . It then uses Granger causality test to establish the directionality of these movements. The results indicate that the US markets –NYSE and NASDAQ –have a significant causal effect on the performance of the Indian NSE. This causality is strictly unidirectional and the NSE exercises no such influence on the NYSE/ NASDAQ .The NSE and LSE have a significantly transmit volatility to each other and this can be attributed to the overlapping trading hours between the two markets. For individual scrips the results are varied and no general conclusion can be drawn about the transmission directionality.