Abstract
This paper tests whether the Carhart four-factor model and the Fama-French five-factor model can explain variation in returns of 1,230 ADRs originating from six developed markets and five emerging markets. We aim to compare emerging market ADRs with developed market ADRs in terms of traditional risk factors significance, model fitness and the existence of abnormal returns. Overall, we find that substantial variations exist among ADRs by their origin-of-market. First, both models show that most of the positive abnormal returns we document accrue to emerging market ADRs, mainly Chinese ADRs. Among the risk factors, market risk premium is found to be most prevalent in both emerging and developed markets. Although we find some difference in the presence of particular risk factors employed in the four-factor vs. five-factor model, overall, there are no significant differences in the explanation power between the two models. Lastly, the low R2 values imply that both models do not work very well with the international market ADRs.
Highlights
American Depositary Receipts (ADRs) are negotiable instruments that represent shares of non-U.S companies that are held by a U.S depositary bank outside the United States
4.1 Baseline Results we use the ordinary least squares (OLS) model with fixed-effects as the baseline model to estimate the 5FM and 4FM in the whole sample of ADRs originating from eleven international markets between June 2009 and July 2019
The ADR market is expected to continue to grow as the world becomes more connected through trade and technology
Summary
American Depositary Receipts (ADRs) are negotiable instruments that represent shares of non-U.S companies that are held by a U.S depositary bank outside the United States. Since JPMorgan established the first depositary receipt program in 1927, the ADR markets have gained momentum since the beginning of 2000 and continued to accelerate in growth after the 2007 meltdown. As one example of the fastest growing groups of ADRs, Chinese ADRs have experienced explosive growth in the ADR markets, totaling 323 as of June 2019 compared to less than 100 before 2009 (Morningstar). Globalization has created an entirely new platform for companies to look beyond their home borders to increase their international footprints, expand their investor base and raise capital. There are more than 2000 ADRs, representing companies located in more than 70 countries. ADRs account for 16% of the entire U.S equity markets (JP Morgan, 2006)
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