Impact of Financial Crisis on International Price Discovery : Evidence from Indian ADRs

The main contribution of this paper is to understand the impact of crisis on information transmission between ADRs and their underlying stocks which has significant implications for asset pricing and asset allocation and investment decisions. Data have been divided in three sub-periods those are Pre-crisis (period from listing of ADR to June 30, 2008), Crisis (July 1, 2008 to June 30, 2009) and Post-crisis (July 1, 2009 to March 31, 2014). The VAR/VECM results indicate that underlying returns seem to overreact to their own past returns and underreact to past ADR returns and similar pattern is observed for ADRs. Granger causality results suggest that ADR market is having bi-directional granger causality between returns of ADRs and corresponding underlying. Variance decomposition results suggest that Indian (domestic) market is having more influence in price discovery of opening prices of ADRs (foreign market). It seems that any innovation in domestic market is playing more role in price discovery of ADRs as compared to innovation in foreign market playing in domestic market. Overall results suggest that during crisis investors become more panic and they give importance to all domestic and international news. Consequently, contribution of both markets in price-discovery of ADRs and corresponding underlying increases during crisis. But contribution of home (Indian) market becomes more prominent