Title: A cointegration analysis of price diffusion amid ADRs and dually listed Indian stocks

Authors: S. Visalakshmi; P. Lakshmi; Kavitha Shanmugam; K. Kesava Prasad

Addresses: VIT Business School, VIT University, Vellore 632 014, Tamil Nadu, India ' Department of Management Studies, National Institute of Technology, Tiruchirappalli 620015, Tamil Nadu, India ' Department of Management Studies, JJ College of Engineering and Technology, Tiruchirappalli – 620 009, Tamil Nadu, India ' Department of Humanities and Sciences, MLR Institute of Technology, Hyderabad, AP, India

Abstract: The aim of this study is to provide empirical support to global investors who are intending participation in stock markets using American Depositary Receipts (ADRs) as the investment vehicle. This study explores the degree of integration between ADRs and dually listed Indian Stocks using daily data for the period from January 2001 to May 2012. Further, the dynamics of price diffusion between the ADRs of Indian stocks pertaining to telecommunication sector cross listed in the US markets is examined by applying econometric tools like cointegration test, vector error correction model and Granger causality test. The findings reveal that both long run cointegration relationships and short run causality relationships exist between domestic stock price series and ADR prices. Further, we find evidence of strong error correction of ADR open and close to domestic stock open and close prices, and weak error correction of domestic market open index returns to foreign market open index returns. This implicates that ADRs appear to overreact to the US market index but underreact to changes in underlying share prices.

Keywords: cross listing; short run relationships; long run relationships; VECM; NYSE; NIFTY; cointegration analysis; price diffusion; ADRs; India; stock markets; American depositary receipts; dual listing; price diffusion; telecommunications industry; USA; United States; econometrics; share prices.

DOI: 10.1504/IJBIR.2016.078871

International Journal of Business Innovation and Research, 2016 Vol.11 No.3, pp.345 - 362

Received: 10 Feb 2014
Accepted: 04 May 2014
Published online: 04 Sep 2016 *

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