Seasonal anomalies in the market for American depository receipts

Júlio Lobão

doi:10.1108/jefas-09-2018-0088

Abstract

Purpose The literature provides extensive evidence for seasonality in stock market returns, but is almost non-existent concerning the potential seasonality in American depository receipts (ADRs). To fill this gap, this paper aims to examine a number of seasonal effects in the market for ADRs. Design/methodology/approach The paper examines four ADRs for the period from April 1999 to March 2017 to look for signs of eight important seasonal anomalies. The authors follow the standard methodology of using dummy variables for the time period of interest to capture excess returns. For comparison, the same analysis on two US stock market indices is conducted. Findings The results show the presence of a highly significant pre-holiday effect in all return series, which does not seem to be justified by risk. Moreover, turn-of-the-month effects, monthly effects and day-of-the-week effects were detected in some of the ADRs. The seasonality patterns under analysis tended to be stronger in emerging market-based ADRs. Research limitations/implications Overall, the results show that significant seasonal patterns were present in the price dynamics of ADRs. Moreover, the findings lend support to the idea that emerging markets are less efficient than developed stock markets. Originality/value This is the most comprehensive study to date for indication of seasonal anomalies in the market for ADRs. The authors use an extensive sample that includes recent significant financial events such as the 2007/2008 financial crisis and consider ADRs with different characteristics, which allows to draw comparisons between the differential price dynamics arising in developed market-based ADRs and in the ADRs whose underlying securities are traded in emerging markets.

Highlights

American depository receipts (ADRs) programs have been expanding during the past decades at a remarkable pace
This paper studies the informational efficiency of ADRs through the examination of eight seasonal patterns in this market: (1) The month-of-the-year effect
While a considerable body of empirical evidence documents the impact of seasonal patterns on stock returns, the literature regarding the potential seasonality in ADRs is almost nonexistent

Summary

Introduction

American depository receipts (ADRs) programs have been expanding during the past decades at a remarkable pace. They found that the effect was observed in the markets of the UK and Japan All these studies indicate that this pre-holiday effect is not a manifestation of other seasonal anomaly such as the day-of-the-week effect or the January effect. As mentioned earlier, Bouges et al (2009) is the only study we know of on the existence of seasonal anomalies in the ADR market They used six years of data to investigate the presence of the day-of-the-week effect, the January effect, the turn-of-the-month effect and the pre-holiday effect in their sample. From all these anomalies, they only found evidence that the turn-of-the-month effect was present in the market for ADRs. 3. 0.0049 0.0023 À0.0002 0.0223 0.0138 0.0037 t-stat

Rt NYSE ARCA

Dependent variable

Christmas Day

Findings

Conclusions