Price transmission dynamics of Chinese ADRs listed on the NYSE

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Purpose: This study aims to examine the price transmission among ADRs (American Depositary Receipts) and their underlying shares, US market index and Hong Kong market index. We will attempt to capture how a shock in the home market is transmitted to the foreign (and vice versa). In addition we will attempt to assess the relative weight of each variable in the system generating unexpected variations of its own and other variables and at what speed the shocks are absorbed. Methodology: ADF unit root test, Johansen??s co-integration test, Granger causality test, VECM, impulse response, variance decomposition Empirical foundation: Five Chinese ADRs listed on the New York Stock Exchange. Each ADR represents a specific industry. Relevant Hong Kong and US market index. Sample period January 3, 2005 to October 31, 2006. Conclusions: ADR prices are mostly influenced by its underlying share. There exists a long-run equilibrium co-integration relationship among the four variables in our system. Results indicate that Chinese ADRs are relatively independent from the behavior of the US market. At aggregate level there is a unidirectional information flow from US market to Hong Kong market with one day lag, but not vice versa. New information incorporated in the underlying shares price can be transmitted to the ADRs price within the same calendar day, whereas the lagged values of underlying shares price have ...