Date of Award
Doctor of Philosophy (PhD)
Dr. Dave O. Jackson
Dr. Cynthia J. Brown
Dr. Marie T. Mora
This dissertation is a collection of three inter-related essays that examine spillovers from interest rates, exchange rates, regional markets, and the U.S. market to the American Depositary Receipt (ADR) returns. The ADRs investigated in this study are from Brazil, Chile, Mexico (Latin America), U.K., Germany, France, Italy (Europe), and Japan, Hong Kong, and Taiwan (Asia).
Essay 1 investigates the price and volatility spillovers as well as the asymmetric impact of positive and negative innovations from interest and exchange rates to ADR returns. Unlike previous studies which use bivariate statistics, the multivariate extension of Nelson's (1991) Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) model is used to analyze spillover effects. The results indicate the existence of price spillovers from interest rates to ADR returns in all ten countries and from exchange rates to the ADR returns in seven of ten countries considered. With regards to volatility, spillovers exist from interest rates to ADR returns in all countries except Chile and from exchange rates to ADR returns in all countries except France and Italy. Further, negative innovations in interest and exchange rates in all ten countries increase volatility more than positive innovations do.
Essay 2 examines the price and volatility spillovers from interest and exchange rates on the portfolios of ADRs from the banking, telecom, and oil & gas sectors. Results indicate that price and volatility spillovers exist from both interest and exchange rates to the industry portfolios but to differing degrees. With regards to response asymmetry, I find that for interest and exchange rates, negative innovations increase volatility more than positive innovations in five of six countries.
Essay 3 examines the proportion of ADR and underlying stock returns that are driven by the regional markets as compared to that of the U.S. market. I find evidence of price spillovers from both the respective regional markets and the U.S. market to the ADR portfolios as well as to their underlying stock portfolios. I also find volatility spillovers from the regional markets and the U.S. market to all the country underlying stock portfolios except the Hong Kong. The negative innovations in the regional and the U.S. markets increase volatility more than positive innovations for the ADR and underlying stock portfolios in eight of the ten countries considered.
The findings of this dissertation have important implications for investors, portfolio managers, banking authorities, and academicians. It enhances the understanding of ADRs' role in international diversification, their relationship with the U.S. and originating markets, as well as specific pricing factors. For policy makers, the findings suggest that additional steps have to be undertaken in fostering the correct environment to promote a smooth and efficient financial system, as well as providing insights that will help in successfully monitoring financial markets.
University of Texas-Pan American