What is it about?
This paper examines the effects of the U.S. investor sentiment on American depository receipts (ADR) premiums by using daily prices of Latin American ADRs from 1995 to 2009. The volatility index (VIX) is used as a proxy for investor expectations about the stock market. High levels in the VIX indicate that investors are fearful about future performance of the U.S. stock market. We estimate a GARCH-M in the framework of an ADR pricing model. We control for liquidity, transaction costs, and domestic and U.S. stock exchange returns. We find that deviations from the law of one price in ADRs can be partially explained by the lag of the smoothed volatility index. There is a structural break in the sample period before and after the enactment of the Sarbanes-Oxley Act.
Featured Image
Why is it important?
This paper has important implications for portfolio diversification on emerging economies as investment managers can improve hedging strategies by incorporating known values of the volatility index.
Perspectives
We are grateful to participants of the 47th AEF Annual conference for relevant suggestions on an earlier version of the manuscript. We also thank participants of the 50th SWFA annual meeting in Houston, TX for constructive comments. We recognize Dr. Diego Escobari, Dr. Emilios Galariotis, and Dr. David Johnk for valuable inputs. We are grateful to an anonymous referee for important suggestions.
Dr. Yongli Luo
Houston Christian University
Read the Original
This page is a summary of: The linkage between the U.S. “fear index” and ADR premiums under non-frictionless stock markets, Journal of Economics and Finance, July 2013, Springer Science + Business Media,
DOI: 10.1007/s12197-013-9265-z.
You can read the full text:
Contributors
The following have contributed to this page
