HCBE Faculty Articles

Title

Currency Volatility and Bid-Ask Spreads of ADRs and Local Shares

Document Type

Article

Date

2017

Publication Title

Global Finance Journal

ISSN or ISBN

1044-0283

Volume

34

Issue

C

First Page

54

Last Page

71

Description

This paper examines the impact of currency volatilities on the average monthly spreads in ADRs and their underlying local shares. We employ a novel estimator for spreads based on two-day-period high and low values of a comprehensive universe of stocks over fifteen years using dynamic panel data estimation. Surprisingly, we find that currency volatility has a larger impact on spreads of ADRs than on their underlying local shares. This adds novel information to the well-documented evidence that local shares and exchange rate variations are the primary drivers of ADR returns. FX implied volatility accounts for about 16.6% of the variance in our sample. We also observe that, on average, ADR spreads are smaller than the spreads on their corresponding underlying shares. We posit that size matters and therefore provide measures of the economic significance of all our estimated results.

DOI

10.1016/j.gfj.2016.07.002

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