Impact of Financial Crisis on International Price Discovery:Evidence from Indian American Depository Receipts

This study investigates the impact of financial crisis on information transmission between Indian American Depository Receipts (ADRs) and corresponding underlying stocks using daily data of six Indian firms. Data have been divided into three sub-periods: pre-crisis (ADR listing date to June 30, 2008); crisis (July 1, 2008 to June 30, 2009); and post-crisis (July 1, 2009 to March 31, 2014). Using Vector Auto Regression/Vector Error Correction Model, this study finds that returns of underlying stocks (ADRs) seem to overreact to its own lagged values, but underreact to lagged values of returns of corresponding ADRs (underlying stocks). Granger causality results suggest bi-directional causality between returns of ADRs and returns of corresponding underlying stocks. Variance decomposition results indicate that Indian (domestic) market is having more influence in price discovery of opening prices of ADRs (foreign market). The main finding is that during the crisis period, price discovery seems to occur in the domestic (Indian) market, and during non-crisis period, price discovery appears to occur in the foreign market (US). The evidence suggests that, during the crisis period, the domestic market becomes more efficient relatively as compared to the foreign market. These results have implications for market participants, regulators, and policymakers.