Price Discovery Study of Chinese ADRs on Global Markets

Yongli Luo^1, and Changxian Lan²

¹College of Business, Houston Baptist University, Houston, United States

²Management College, Beijing Union University, Beijing, China

Cite this paper:
Yongli Luo and Changxian Lan. Price Discovery Study of Chinese ADRs on Global Markets. Journal of Finance and Economics. 2018; 6(1):32-37. doi: 10.12691/jfe-6-1-5

Abstract

This paper analyzes the price discovery mechanism between the Chinese American Depository Receipts (ADRs) listed on the New York Stock Exchange (NYSE) and their underlying H shares on the Hong Kong Stock Exchange (HKEX). It employs the Permanent-Transitory decomposition in vector autoregression (VAR) model, and finds that the New York stock market makes the principal contribution to the price discovery, and the proportion of contribution is 84.84%; while the Hong Kong market makes only subsidiary contribution of 15.16%. In addition, it confirms the existence of the long-term cointegration relationship between ADRs and H shares, which implies that portfolio diversification among Chinese ADRs is consistent with Global Center Hypothesis and efficient for international investors.

Keywords:
Chinese ADRs price discovery permanent transitory decomposition

This work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]	Fama E. & K. French. (1988). Permanent and temporary components of stock prices, Journal of Political Economy 96, 246-273.
[2]	Kim, M., A.C. Szakmary & I. Mathur. (2000). Price transmission dynamics between ADRs and their underlying foreign securities. Journal of Banking and Finance 24, 1359-1382.
[3]	Jiang, C.X. (1998). Diversification with American Depository Receipts: the dynamics and the pricing factors. Journal of Business Finance and Accounting 25, 683-699.
[4]	Bacidore, J. & G. Sofianos. (2002). Liquidity provision and specialist trading in NYSE listed non-U.S. stocks. Journal of Financial Economics 63, 133-158.
[5]	Alaganar, V.T. & R., Bhar. (2001). Diversification gains from American Depositary Receipts and foreign equities: evidence from Australian stocks. Journal of International Financial Markets, Institutions and Money 11, 97-113.
[6]	Patro, D.K.(2000). Return behavior and pricing of American Depositary Receipts. Journal of International Finance Markets, Institutions and Money 10, 43-67.
[7]	Choi, Y.K. & D. Kim. (2000). Determinants of American Depositary Receipts and their underlying stock returns: implications for international diversification. International Review of Financial Analysis 9, 351-368.
[8]	Xu, X.E. & H.G. Fung (2002). Information flows across markets evidence from China-Backed stocks dually listed in Hong Kong and New York, The Financial Review, 37, 563-588.
[9]	Kutan A.M. & H. Zhou. (2006). Determinants of Returns and Volatility of Chinese ADRs at NYSE. Journal of Multinational Financial Management, 16(1), 1-15.
[10]	Su, Q. & T.T. Chong. (2007). Determining the contributions to price discovery for Chinese cross-listed stocks, Pacific-Basin Finance Journal, 15(2), 140-153.
[11]	Gonzalo, J. & W. J. Granger. (1995). Estimation of common long-memory components in cointegrated systems, Journal of Business & Economics Statistics 13, 27-36.
[12]	Granger C.W.J. & P. Newbold. (1974). Spurious regressions in econometrics, Journal of Econometrics 2, 111-120.
[13]	Dickey, D. & W. Fuller. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of American Statistical Association 74, 427-431.
[14]	Phillips, P. (1986). Understanding spurious regressions in econometrics, Journal of Econometrics 33, 311-340.
[15]	MacKinnon, J.G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics 11, 601-618.
[16]	MacKinnon, J.G., A.A. Haug & L. Michelis (1999). Numerical distribution functions of likelihood ratio tests for cointegration. Journal of Applied Econometrics 14, 563-577.
[17]	Johansen, S. & K. Juselius. (1990). Maximum likelihood estimation and inference on cointegration-with application to the demand for money, Oxford Bulletin of Economics and Statistics 52(2), 169-210.
[18]	Banerjee, A., J.J. Dolado, J.W. Galbraith & D.F. Hendry (1993). Co-integration, error-correction, and the econometric analysis of non-stationary data, Oxford University Press, Oxford.
[19]	Ely, D & M. Salehizadeh (2001). American depositary receipts: an analysis of international stock price movements, International Review of Financial Analysis 10, 343-363.
[20]	Erbaykal, E, H.A. Okuyan & O. Kadıoğlu. (2008). Cointegration and Priority Relationships between Stock Markets of Turkey, Brazil and Argentina. European Journal of Economics, Finance and Administrative Sciences, 10,151-158.
[21]	Fong, K. & R. Zurbrueggb (2003). How much do locals contribute to the price discovery process? Journal of Empirical Finance 10 (3), 305-320.
[22]	Granger, W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica 37, 424-438.
[23]	Hasbrouck, J. (1995). One security, many markets: Determining the contributions to price discovery. Journal of Finance 50, 1175-1199.