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


  • Junming Hsu
  • Hsin-Yi Wang


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

Suggested Citation

  • Junming Hsu & Hsin-Yi Wang, 2008. "Why Do Price Spreads Between Domestic Shares And Their Adrs Vary Over Time?," Pacific Economic Review, Wiley Blackwell, vol. 13(4), pages 473-491, October.
  • Handle: RePEc:bla:pacecr:v:13:y:2008:i:4:p:473-491

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    References listed on IDEAS

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    5. James Heckman, 1997. "Instrumental Variables: A Study of Implicit Behavioral Assumptions Used in Making Program Evaluations," Journal of Human Resources, University of Wisconsin Press, vol. 32(3), pages 441-462.
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    7. Bjorklund, Anders & Moffitt, Robert, 1987. "The Estimation of Wage Gains and Welfare Gains in Self-selection," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 42-49, February.
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    Cited by:

    1. Ansotegui, Carmen & Bassiouny, Aliaa & Tooma, Eskandar, 2013. "The proof is in the pudding: Arbitrage is possible in limited emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 342-357.
    2. 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.
    3. 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.
    4. repec:eee:intfin:v:51:y:2017:i:c:p:1-14 is not listed on IDEAS

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