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Cross-Border Trading as a Mechanism for Capital Flight: ADRs and the Argentine Crisis

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  • Sebastian Auguste
  • Kathryn M.E. Dominguez

    ()

  • Herman Kamil
  • Linda L. Tesar

Abstract

This paper examines the surprising performance of the Argentine stock market in the midst of the country’s most recent financial crisis and the role played by ADRs in Argentine capital flight. Although Argentine investors were subject to capital controls, they were able to purchase stocks with associated ADRs for pesos in Argentina, convert them into ADRs, re-sell them in New York for dollars and deposit the dollar proceeds in U.S. bank accounts. In the paper we show that: (1) ADR discounts went as high as 60% (indicating that Argentine investors were willing to pay significant amounts in order to legally move their funds abroad), (2) the market anticipated (correctly) a 40% devaluation, (3) local market factors in Argentina became more important in pricing peso denominated stocks with associated ADRs, while the same stocks in New York were mainly priced based on global factors, (4) capital outflow using the ADR market was substantial (our estimate is between $835 million and $3.4 billion).

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 513.

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Length: 37 pages
Date of creation: 01 Nov 2002
Date of revision:
Handle: RePEc:wdi:papers:2002-513

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Keywords: Argentina; Financial Crises; Capital Controls; ADRs;

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Cited by:
  1. Auguste, Sebastian & Dominguez, Kathryn M.E. & Kamil, Herman & Tesar, Linda L., 2006. "Cross-border trading as a mechanism for implicit capital flight: ADRs and the Argentine crisis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(7), pages 1259-1295, October.
  2. Eduardo Levy Yeyati & Sergio Luis Schmukler & Neeltje Van Horen, 2006. "International Financial Integration through the Law of One Price," Business School Working Papers, Universidad Torcuato Di Tella 2006-01, Universidad Torcuato Di Tella.
  3. Kristin J. Forbes, 2005. "The Microeconomic Evidence on Capital Controls: No Free Lunch," NBER Working Papers 11372, National Bureau of Economic Research, Inc.
  4. Marina Halac & Sergio Schmukler, 2003. "Distributional effects of crises : the role of financial transfers," Policy Research Working Paper Series 3173, The World Bank.
  5. Kathryn M.E. Dominguez & Linda L. Tesar, 2004. "International Borrowing and Macroeconomic Performance in Argentina," Working Papers, Research Seminar in International Economics, University of Michigan 532, Research Seminar in International Economics, University of Michigan.
  6. 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.
  7. Marcos Chamon & Marcio Garcia, 2013. "Capital controls in Brazil: effective?," Textos para discussão, Department of Economics PUC-Rio (Brazil) 606, Department of Economics PUC-Rio (Brazil).
  8. Jillian Faucette & Alexander Rothenberg & Francis Warnock, 2005. "Outflows-induced sudden stops," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 8(2), pages 119-129.
  9. Brahima Coulibaly, 2009. "Currency unions and currency crises: an empirical assessment," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(3), pages 199-221.

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