Currency volatility and bid-ask spreads of ADRs and local shares |
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| Affiliation: | 1. Nova Southeastern University, Department of Finance, College of Business and Entrepreneurship, Fort Lauderdale, FL 33314, United States;2. Florida International University, Department of Finance, College of Business Administration, Miami, FL 33199, United States;1. Georgetown University, Washington, DC, USA;2. Universidad de Chile, Santiago de Chile, Chile;1. Macquarie Graduate School of Management, Macquarie University, General Post Office, GPO. Box 12103, Central, Hong Kong;2. School of Business, Australian Catholic University, NCR House, Level 10, 8-20 Napier Street, North Sydney, NSW 2059, Australia;1. Mississippi State University, Department of Finance and Economics, College of Business, Mississippi State, MS 39762, USA;2. University of New Orleans, Department of Economics and Finance, New Orleans, LA 70148, USA;3. American University, Kogod School of Business, Department of Finance and Real Estate, 4400 Massachusetts Avenue, NW, Washington, DC 20016, USA |
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| Abstract: | 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. |
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