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Essays on ADR Pricing Open Access

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This dissertation is an empirical research on pricing American Depository Receipts (ADRs). It addresses questions on the relationships of exchange-listed ADRs with the US market portfolio, home market portfolio and exchange rate changes. Furthermore, it touches upon the two-market puzzle for exchange-listed ADRs: Do they move more with the US market or home market, given that the global market is not fully integrated?Three essays in this dissertation deal with ADR pricing from different perspectives. The first essay closely follows the recent studies using traditional factor pricing models. It intends to reconcile the mixed results in the literature with all of the country ADR portfolios available from 1998 to 2006. In this essay, three risk factors would be considered - the US market portfolio, home market portfolio and exchange rate changes. The second essay presents a two-state Capital Asset Pricing Model (CAPM) for ADRs assuming absence of exchange rate risk. It adopts the standard regime switching model by Hamilton (1988, 1989) to combine both the home market and the US market. This approach is new to ADR pricing literature. The third essay will expand the regime switching-CAPM model developed above, by adding expected exchange rate returns to the home market exposure. The proportions of the effect of currency returns on ADR index returns would be estimated as the pass-through of exchange rate risks to ADR index returns. This study will provide evidence on the returns of exchange-listed ADRs with market risk factors and exchange rate factor. This is important to our understanding of the benefits of international diversification, and has practical implications for asset management. "ADRs are worth a closer look." (Wahab and Khandwala 1992)

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