American Depositary Receipts (ADRs) are certificates, denominated in U.S. dollars, that represent shares of non-U.S. company securities. There are about 2000 ADRs traded on U.S. exchanges, namely NYSE and NASDAQ, or through the over-the-counter (OTC) market, representing shares of companies from at least 70 different countries. ADRs are among the most direct and popular financial instruments for investing in foreign companies, and have been actively used to diversify portfolios. In 2015, foreign equity holdings \u2013 through ADRs and local shares \u2013 accounted for 19% of U.S. investors\u2019 equity portfolios. Specifically, total global investments in DRs, both American and non-American, were estimated to be approximately $1 trillion USD, with about 90% specifically in ADRs, according to reports by JP Morgan. Some of the most traded Exchange-Traded Funds (ETFs) are comprised of ADRs as well. For instance, 14 Chinese ADRs were added to the MSCI Emerging Market Index in late 2015. The iShares MSCI Emerging Markets ETF (EEM), which tracks this index, has a market capitalization of $24 billion and daily average volume of 72 million shares.<\/p>\n\n\n\n
Due to their cross-border nature, ADRs\u2019 returns are\nsignificantly dependent on the market sentiments of both the U.S. and\noriginating home markets. Especially, ADRs from Asian countries, such as Japan,\nHong Kong, China, Taiwan, India, and Korea, are of particular interest for two\nreasons. First, these ADRs provide U.S. investors with direct viable means to\ninvest in foreign and emerging markets. Consequently, Asian DRs listed on\nnon-Asian exchanges accounted for over 44% of the total DR market\ncapitalization by the third quarter of 2015.<\/p>\n\n\n\n
Second, the time zones for the aforementioned countries are\n13 to 14 hours ahead of New York\u2019s Eastern Standard Time (EST). Therefore, the\ntrading hours of the U.S. market and their home markets do not overlap. The\noriginating home markets open after the U.S. market closes and vice versa. This\nleads to not only their asynchronous returns with underlying equities but also\nthe price fluctuations during and after the U.S. market hours. The connection\n(or contrast) between completely asynchronous markets has been of particular\ninterest to especially multi-asset investors and other institutional investors.\n<\/p>\n\n\n\n
Similarly, the time zone discrepancy allows us to split\ntheir returns into intraday and overnight components, each with fundamentally\ndifferent price driving factors. For the Asian ADRs studied herein, intraday\nreturns can be intuitively attributed to the news, conditions, and outlook of\nthe U.S. market, whereas overnight returns are predominantly driven by the\nlocal Asian markets. We seek to understand the volatility contribution by\ndifferent effects from each market.<\/p>\n\n\n\n
Kang and\nLeung (2016)<\/a> analyze the salient characteristics\nof ADRs, including the key statistics of the intraday returns and overnight\nreturns, their distributions and correlations with the U.S. market. In\nparticular, the correlation of each ADR with respect to the U.S. market is\nuseful since it can serve as the basis of some trading strategies. Since\nintraday returns reflect price fluctuations during the U.S. market hours, they\nare expected to have a relatively high correlation with the U.S. market\nreturns. On a similar note, overnight returns are expected to have a significantly\nlower correlation. The study determines these correlations, quantitatively\ncontrast their effects on the overall volatility and performance of each ADR.\nMost importantly, pair trading strategies are developed and back tested to take\nadvantage of the path behaviors of asynchronous ADRs.\n\nThe paper is available in pdf here: https:\/\/ssrn.com\/abstract=2858048<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" American Depositary Receipts (ADRs) are certificates, denominated in U.S. dollars, that represent shares of non-U.S. company securities. There are about 2000 ADRs traded on U.S. exchanges, namely NYSE and NASDAQ, or through the over-the-counter (OTC) market, representing shares of companies from at least 70 different countries.<\/p>\n","protected":false},"author":189,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[339,343,338,352,344,342],"tags":[851,806,852,8446,494,487],"contributors-categories":[13668],"class_list":{"0":"post-9480","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-data-science","7":"category-programing-languages","8":"category-ibkr-quant-news","9":"category-quant-north-america","10":"category-quant-regions","11":"category-r-development","12":"tag-algo-trading","13":"tag-data-science","14":"tag-machine-learning","15":"tag-prof-tim-leung-uw-computational-finance-risk-management-cfrm-program","16":"tag-quant","17":"tag-r","18":"contributors-categories-computational-finance-risk-management-university-of-washington"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n