American Depository Receipt ADR Compensation And Fluctuation Factors

The factors influencing the return and volatility of ADR have been tested in this thesis. The sample of the research is consisted of twelve Chinese ADRs, which are based on Hong Kong market and the issuance companies are also listed in Shanghai Stock Exchange, and three Italian ADRs are selected that originated from Borsa Italiana. The result shows that:host market (U.S), underlying assets and underlying market (Hong Kong Stock Exchange for Chinese ADRs; Borsa Italiana for Italian ADRs) do have impact on return and volatility of ADRs. The local market (Shanghai Stock Exchange) has no significant influence over Chinese ADRs selected. The exchange rate plays an important role in the Italian ADR return determination. The change of the power of influence of the factors after financial crisis has been studied as well. For Chinese ADRs, the impact of U.S. market has decreased after the financial crisis. By contrast, U.S market has greater influence on Italian ADRs after U.S. financial crisis. However, after the Italian debt crisis, the impact of U.S market on Italian ADRs decreases.My research indicates that U.S market, as the largest and most liquid market, plays a critical role in the determination of return and volatility of ADRs. Moreover, the low correlation between Chinese mainland market and ADRs supports the fact that Chinese marke is not mature. The return behavior of Chinese ADRs is dominated by U.S market, which makes it a less attractive investment for diversification. However, due to the less integration with U.S market, the diversification effect during the crisis that occurred in U.S is better. Compared to Chinese ADRs, Italian market is more correlated with U.S market and more sophisticated. As a result, Italian ADRs are more likely to follow the "Law of One Price" and to be better investment vehicle for diversification. However, during the time of crisis, the high correlation weakens its diversification effect.