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Cross-border trading as a mechanism for implicit capital flight: ADRs and the Argentine crisis

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Author Info

  • Auguste, Sebastian
  • Dominguez, Kathryn M.E.
  • Kamil, Herman
  • Tesar, Linda L.

Abstract

Cross-listed shares may confound government efforts to control capital outflows by providing a legal means through which investors can transfer their wealth outside the country. We study the recent experience of investors in Argentina and Venezuela who while subject to capital controls, were able to purchase cross-listed shares using local currency, convert the shares into dollardenominated shares, re-sell them in New York and deposit the dollar proceeds in U.S. bank accounts. We show that capital controls drive a wedge between the price of local shares and their corresponding cross-listed shares. This anomalous wedge provides a measure of the market’s implicit devaluation forecast and the value of capital control circumvention. We also find that the imposition of controls in Argentina led to changes in the underlying pricing structure of crosslisted shares in Buenos Aires and New York.

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Bibliographic Info

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

Volume (Year): 53 (2006)
Issue (Month): 7 (October)
Pages: 1259-1295

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Handle: RePEc:eee:moneco:v:53:y:2006:i:7:p:1259-1295

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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Citations

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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. Maltritz, Dominik & Eichler, Stefan, 2010. "Currency crisis prediction using ADR market data: An options-based approach," International Journal of Forecasting, Elsevier, vol. 26(4), pages 858-884, October.
  3. Sebastián Auguste & Ricardo N. Bebczuk & Ramiro Moya, 2011. "The Demand for Mortgages under Macro Volatility: The Argentine Case," Research Department Publications 4751, Inter-American Development Bank, Research Department.
  4. Arteta, Carlos & Hale, Galina, 2008. "Sovereign debt crises and credit to the private sector," Journal of International Economics, Elsevier, vol. 74(1), pages 53-69, January.
  5. Alexander D. Rothenberg & Francis E. Warnock, 2006. "Sudden Flight and True Sudden Stops," NBER Working Papers 12726, National Bureau of Economic Research, Inc.
  6. Edison, Hali J. & Warnock, Francis E., 2008. "Cross-border listings, capital controls, and equity flows to emerging markets," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 1013-1027, October.
  7. Eichler, Stefan, 2011. "Exchange rate expectations and the pricing of Chinese cross-listed stocks," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 443-455, February.
  8. 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.
  9. repec:udt:wpbsdt:2012-03 is not listed on IDEAS
  10. Alexander D. Rothenberg & Francis E. Warnock, 2007. "Sudden Flight and True Sudden Stops," The Institute for International Integration Studies Discussion Paper Series iiisdp187, IIIS.
  11. Yeyati, Eduardo Levy & Schmukler, Sergio L. & Van Horen, Neeltje, 2008. "Crises, capital controls, and financial integration," Policy Research Working Paper Series 4770, The World Bank.
  12. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2006. "Capital Controls, Liberalizations, and Foreign Direct Investment," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1433-1464.
  13. Gagnon, Louis & Karolyi, G. Andrew, 2004. "Multi-market Trading and Arbitrage," Working Paper Series 2004-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  14. Enrique G. Mendoza & Katherine A. Smith, 2004. "Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices," NBER Working Papers 10940, National Bureau of Economic Research, Inc.
  15. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2009. "International financial integration through the law of one price: The role of liquidity and capital controls," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 432-463, July.
  16. Pasquariello, Paolo, 2008. "The anatomy of financial crises: Evidence from the emerging ADR market," Journal of International Economics, Elsevier, vol. 76(2), pages 193-207, December.
  17. Arquette, Gregory C. & Brown Jr., William O. & Burdekin, Richard C.K., 2008. "US ADR and Hong Kong H-share discounts of Shanghai-listed firms," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1916-1927, September.

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