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American Depository Receipts

American Depository Receipts . NYFC Partners. Sherry Chen Andrew Frankel Christina Nitz Jean Yu. February 27, 2002. Agenda. ADR Basics Hypothesis Methodology Data Set Regression Results Concluding Remarks Future Research Topics. ADR Basics.

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American Depository Receipts

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  1. American Depository Receipts NYFC Partners Sherry Chen Andrew Frankel Christina Nitz Jean Yu February 27, 2002

  2. Agenda • ADR Basics • Hypothesis • Methodology • Data Set • Regression Results • Concluding Remarks • Future Research Topics

  3. ADR Basics • Generally represent a non-U.S. company’s publicly traded equity • Overcome many inherent operational and custodial hurtles of international investing • Growth of the market primarily driven by institutional investors • 75% of U.S. institutional investors own ADRs

  4. Hypothesis Abnormal ADR trading volume possesses predictive power for associated index returns due to the fact that ADRs are primarily invested in by more sophisticated institutional investors

  5. Regression MethodologyMoving Average Over Past Twelve Months • Dependent variable • Country return • Independent variable • Monthly ADR volume minus past twelve month average trading volume

  6. Regression MethodologyResiduals Against S&P 500 Trading Volume First Regression • Dependent variable • ADR trading volume • Independent variable • S&P 500 trading volume Second Regression • Dependent variable • Country return • Independent variable • Residuals of first regression

  7. Data Set • 17 countries • 7 developing • 10 developed • Pulled all available data from 1970 through 2000 • 376 ADR issues selected Source: Data Stream and Compustat

  8. Regression Results

  9. Abnormal TradingOver Twelve Month Moving Average

  10. Abnormal Trading Over S&P 500 Index

  11. P-Value of ADR Trading Volume 85% 90% 84% 79% 77% 80% 70% 70% 60% 57% 60% 50% 40% 40% 30% 27% 30% 23% 19% 17% 20% 14% 9% 10% 3% 2% 0% Italy India Brazil China Spain Japan France Ireland Mexico Chile Australia Germany Argentina Switzerland Netherlands South Africa United Kingdom Developing Countries Developed Countries

  12. Concluding Remarks • Abnormal ADR trading does posses predictive power for index returns in some markets. • The predictive power is more predominant for developing countries than developed countries. • One possible explanation of our observation is that developing markets are less transparent.

  13. Future Research Topics • Future research might include: • Data refinement • Multi-variant regression • Out of sample testing

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