Adrs as Leading Indicators of Exchange Rates - the Case of Argentine Adrs

38 Pages Posted: 15 Nov 2003

See all articles by Padma Kadiyala

Padma Kadiyala

Pace University - Lubin School of Business

Prasad Kadiyala

First Principles Capital Management, LLC (FPCM)

Date Written: September 15, 2003

Abstract

We study the pricing of Argentine ADRs during and after the transition of the Argentine economy from a pegged exchange rate to a freely floating exchange rate regime. We document a discount of 30% between the dollar denominated price of the ADR and the peso denominated price of its local counterpart (price ratio) during the transition period. The discount reflected the market's expectation of the 'true' exchange rate between the dollar and peso. Relative prices of the most heavily traded ADR and of its local counterpart continued to be informative about the exchange rate even after the peso was allowed to float freely against the dollar. The robustness of the Argentine evidence is confirmed by finding that prices of Thai ADRs have similar predictive power for exchange rates during a period when the Thai market underwent a similar change in exchange rate policy as Argentina. Finally, we rely on evidence from Malaysia, which switched from a managed float to a fixed exchange rate policy, to confirm that the Argentine and Thai ADRs derive their informational advantage from greater liquidity in the ADR market.

JEL Classification: F3, G1

Suggested Citation

Kadiyala, Padma and Kadiyala, Prasad, Adrs as Leading Indicators of Exchange Rates - the Case of Argentine Adrs (September 15, 2003). Pace University Finance Research Paper No. 2003/04, Available at SSRN: https://ssrn.com/abstract=462960 or http://dx.doi.org/10.2139/ssrn.462960

Padma Kadiyala (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
914-773-3620 (Phone)

Prasad Kadiyala

First Principles Capital Management, LLC (FPCM) ( email )

United States
212.380.2297 (Phone)

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