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The anatomy of financial crises: Evidence from the emerging ADR market

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  • Pasquariello, Paolo

Abstract

We study the anatomy of recent financial crises in Mexico, East Asia, Russia, Brazil, Turkey, and Argentina by investigating the efficiency and pricing of the emerging American depositary receipt (ADR) market. We use a non-parametric technique to test for persistent regime shifts in two basic structural relationships for ADR returns in 20 emerging countries -- identified via arbitrage and capital mobility considerations -- that should always hold in efficient and integrated capital markets. We find that those "normal" market conditions were instead often violated in proximity of financial crises: The law of one price often weakened (by 54% on average) and domestic sources of risk became more important (often by more than 100%) for many emerging ADRs. We also find the likelihood of these regime shifts to be related to proxies for uncertainty among investors, exchange rate volatility, trade linkages, and liquidity (but not stock market trends, currency devaluations, capital flight, or capital controls).

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 76 (2008)
Issue (Month): 2 (December)
Pages: 193-207

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Handle: RePEc:eee:inecon:v:76:y:2008:i:2:p:193-207

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Regime shifts Financial crises ADRs Market efficiency Market integration;

References

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Cited by:
  1. Chandar, Nandini & Patro, Dilip K. & Yezegel, Ari, 2009. "Crises, contagion and cross-listings," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1709-1729, September.
  2. Eichler, Stefan, 2012. "Financial crisis risk, ECB “non-standard” measures, and the external value of the euro," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 257-265.
  3. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2009. "The ADR shadow exchange rate as an early warning indicator for currency crises," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1983-1995, November.

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