Abstract

AN EMPIRICAL ANALYSIS OF THE U.S. MARKET FOR INTERNATIONAL EQUITY

Norman Schürhoff

Graduate School of Industrial Administration
Carnegie Mellon University

This paper investigates the role of U.S. financial markets in global equity trading and research by means of the dynamic pricing relationship between American and Global Depositary Receipts (ADRs/ GDRs) traded in the U.S. capital markets and the corresponding underlying shares traded in the issuing company's home equity market. In addition, the paper provides a unique overview of the ADR market and sheds light on equilibrium relationships between ADRs and underlying ordinary shares. The analyses conducted are based on a representative sample of 614 stocks listed and traded in two unsynchronized financial markets, the United States and the respective local stock market, during the period January 1, 1996 through January 19, 1998. Observed cointegration across markets leads to a vector error correction model incorporating a short-term adjustment mechanism being the appropriate representation of the data. In addition, the data synchronization problem gives rise to adjustments to the standard model. The standard model is, hence, extended to incorporate synchronous trading, non-synchronous serial trading, and two types of non-synchronous parallel trading.