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Foreign exchange risk, world diversification and Taiwanese ADRs

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  • Alan Wang
  • Sheng-Yung Yang

Abstract

This study tries to answer the following question: Should the US investors purchase American depository receipts (ADRs) issued by Taiwanese multinationals? The conditional international asset pricing model of Dumas and Solnik (Journal of Finance, 50, 445-79, 1995) is applied to price these Taiwanese American depository receipts (ADRs). Empirical results show that foreign exchange risk is priced in Taiwanese ADRs. Moreover, Taiwanese ADRs are shown to help US investors diversify their portfolios globally. These findings suggest that Taiwanese ADRs are valid investment tools for US investors who seek international diversifications.

Suggested Citation

  • Alan Wang & Sheng-Yung Yang, 2004. "Foreign exchange risk, world diversification and Taiwanese ADRs," Applied Economics Letters, Taylor & Francis Journals, vol. 11(12), pages 755-758.
    • Handle: RePEc:taf:apeclt:v:11:y:2004:i:12:p:755-758
    DOI: 10.1080/1350485042000254629
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    References listed on IDEAS

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    1. Dumas, Bernard & Solnik, Bruno, 1995. "The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-479, June.
    2. 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.
    3. Stephen R. Foerster & G. Andrew Karolyi, 1999. "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States," Journal of Finance, American Finance Association, vol. 54(3), pages 981-1013, June.
    4. Alexander, Gordon J. & Eun, Cheol S. & Janakiramanan, S., 1988. "International Listings and Stock Returns: Some Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(2), pages 135-151, June.
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    Cited by:

    1. Alan Tse-Shih Wang & Ming-Yuan Leon Li & Ti-Chen Chen, 2010. "Price transmission, foreign exchange rate risks and global diversification of ADRs," Applied Economics, Taylor & Francis Journals, vol. 42(14), pages 1811-1823.
    2. Sheng-Yung Yang, 2007. "Inter-day return and volatility dynamics between Japanese ADRs and their underlying securities," Applied Financial Economics, Taylor & Francis Journals, vol. 17(10), pages 837-853.
    3. Bartram, Söhnke M. & Bodnar, Gordon M., 2012. "Crossing the lines: The conditional relation between exchange rate exposure and stock returns in emerging and developed markets," Journal of International Money and Finance, Elsevier, vol. 31(4), pages 766-792.

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