A Tale of Two Prices: Liquidity and Asset Prices in Multiple Markets

P. Chan, Justin S.; Hong, Dong; Subrahmanyam, Marti G.

doi:10.2139/ssrn.685841

A Tale of Two Prices: Liquidity and Asset Prices in Multiple Markets

EFA 2006 Zurich Meetings

39 Pages Posted: 24 May 2006

See all articles by Justin S. P. Chan

Dong Hong

Singapore Management University - Lee Kong Chian School of Business

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Date Written: March 2006

Abstract

This paper investigates the liquidity effect in asset pricing by studying the liquidity-premium relationship of an American Depositary Receipt (ADR) and its underlying share. Using the Amihud (2002) measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of changes in these variables. We find that the liquidity effects remain strong after we control for firm size and a number of country characteristics, such as the expected change in the foreign exchange rate, the stock market performance, as well as several variables measuring the openness and transparency of the home market.

Keywords: American Depositary Receipts (ADRs), dual listing, liquidity, turnover, premium

JEL Classification: G10, G12, G15

Suggested Citation: Suggested Citation

Chan, Justin Sai-Pang and Hong, Dong and Subrahmanyam, Marti G., A Tale of Two Prices: Liquidity and Asset Prices in Multiple Markets (March 2006). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=685841 or http://dx.doi.org/10.2139/ssrn.685841