Price Transmission Effect between GDRs and Their Underlying Stocks—Evidence from Taiwan

In this paper we examine the price transmission effect between ADRs or GDRs and their respective underlying stocks. This linkage is investigated for Granger causality using difference form and VECM. Results reveal unidirectional causality from Taiwan's capital market to the foreign market. This asymmetry suggests the domestic market plays a dominant role in price transmission relative to the foreign market. Besides, the prices of both markets will make adjustment to establish a long run cointegrated equilibrium. An additional finding is that both the premium and net buy have significant impacts on international price transmission for over twenty percent samples. Empirical outcomes also provide the evidence that our model is quite robust.