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Why Do Price Spreads Between Domestic Shares And Their Adrs Vary Over Time?


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  • Junming Hsu
  • Hsin-Yi Wang
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    The exchange translated price spreads between domestic stocks and their American depositary receipts (ADRs) are conventionally ascribed to market friction. However, price spreads vary over time and sometimes fluctuate dramatically, which is hardly explainable by friction costs and implies the existence of arbitrage opportunities. This study hypothesizes that changes in trading volume and macro events generate heterogeneous expectations between two markets, which augments price spreads. Using a sample of 37 dual-listing firms of six Far Eastern countries, we confirm this hypothesis by showing that domestic volume and macro events shift price spreads. We also find that: (i) the liberalization of capital control in Korea and Taiwan slashed price spreads; and (ii) investors can profit by trading Hong Kong stocks and ADRs. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Asia Pty Ltd

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Pacific Economic Review.

    Volume (Year): 13 (2008)
    Issue (Month): 4 (October)
    Pages: 473-491

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    Handle: RePEc:bla:pacecr:v:13:y:2008:i:4:p:473-491

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    Cited by:
    1. Dey, Malay K. & Wang, Chaoyan, 2012. "Return spread and liquidity: Evidence from Hong Kong ADRs," Research in International Business and Finance, Elsevier, vol. 26(2), pages 164-180.
    2. Weiju Young & Chun-An Li, 2011. "Price transmission between stocks of European countries and their American depositary receipts," Applied Financial Economics, Taylor & Francis Journals, vol. 21(11), pages 825-835.


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