Price Discovery Study of Chinese ADRs on Global Markets

This paper analyzes the price discovery mechanism between the Chinese American Depository Receipts (ADRs) listed on the New York Stock Exchange (NYSE) and their underlying H shares on the Hong Kong Stock Exchange (HKEX). It employs the Permanent-Transitory decomposition in vector autoregression (VAR) model, and finds that the New York stock market makes the principal contribution to the price discovery, and the proportion of contribution is 84.84%; while the Hong Kong market makes only subsidiary contribution of 15.16%. In addition, it confirms the existence of the long-term cointegration relationship between ADRs and H shares, which implies that portfolio diversification among Chinese ADRs is consistent with Global Center Hypothesis and efficient for international investors