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International Diversification with American Depository Receipts (ADRs)

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  • Kabir, M. Humayun

    (Massey University)

  • Hassan, M. Kabir

    (University of New Orleans)

  • Maroney, Neal C.

    (University of New Orleans)

Abstract

It is already well known that U.S. investors can achieve higher gains by investing directly in emerging markets (De Santis, 1997). Given the opportunity to invest directly in the shares of stocks in the developed (DCs) and emerging (EM) markets, it is interesting to know whether the U.S. investors can potentially gain any benefits by investing in ADRs. We test both index models, and SDF-based model.Our findings show that U.S. investors needed to invest in both ADRs and country portfolios in developed in the eighties, and in Latin American countries in early nineties. During the early and late nineties, we find substitutability between ADRs and country portfolios in DCs. As more and more ADRs are enlisted in the US market from developed countries over time, the ADRs become substitutes to country. Similarly, countries with higher number of ADRs irrespective of regions show the same pattern of substitutability between ADRs and country indices. However, such substitutability does not exist for countries with the highest number of ADRs by the end of sample period, 2001. On the other hand, U.S. investors can achieve the diversification benefits by investing ADRs along with U.S. market index in Asia. The significant marginal contribution of one-third of developed countries requires investment in ADRs and U.S. market in the developed countries. And investors do not need to hold both ADRs and country as it was the case in the eighties. On the other hand, investors need to hold both ADRs and country portfolios in most of the Asian countries to achieve diversification benefits at margin.

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Bibliographic Info

Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2005-05.

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Length: 34 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:uno:wpaper:2005-05

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Keywords: Emerging markets; American Depository Receipts (ADR); Diversification;

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  1. William N. Goetzmann & Jonathan E. Ingersoll, Jr. & Matthew I. Spiegel & Ivo Welch, 2002. "Sharpening Sharpe Ratios," Yale School of Management Working Papers ysm29, Yale School of Management.
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  8. Kim, Sangbae & In, Francis, 2005. "The relationship between stock returns and inflation: new evidence from wavelet analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 435-444, June.
  9. Kim, Minho & Szakmary, Andrew C. & Mathur, Ike, 2000. "Price transmission dynamics between ADRs and their underlying foreign securities," Journal of Banking & Finance, Elsevier, vol. 24(8), pages 1359-1382, August.
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  12. Christine X. Jiang, 1998. "Diversification with American Depository Receipts: The Dynamics and the Pricing Factors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(5&6), pages 683-699.
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