2015-02: Home Country Macroeconomic Fundamentals and the ADR Market: The Case of the BRICs (Working paper)

Abstract

This study investigates the linkages of the ADR prices of the BRICs with their respective home country economic fundamentals. Specifically, the paper attempts to explore the (a) long run relationship and (b) short run lead-lag relationship between the ADR prices and the major economic indicators for the home country. Using a Johansen - Vector Autorgressive (VAR) approach with monthly data for the period - January 2000 to February 2013, we find that, with the exception of Russia, there is a long run relationship between ADR prices and the home country's economic growth. This seems to be in line with the conventional view that 'higher growth higher returns'. The evidence for the short run dynamics suggests that past values of some of the economic indicators can be used to forecast Brazilian, Russian and Indian ADR returns. The predictability may allow investors to exploit excess returns on ADRs based on these macroeconomic variables. In general, the short run dynamics for the case of ADRs are different from that of their respective home country stock market index.