Is there a reversal in the price discovery process under different market conditions? Evidence from Korean ADRs and their underlying foreign securities

This paper investigates whether the price discovery ability of American Depository Receipts (ADRs) increases when large movements occur in the U.S. stock market, using an examination of the information transmission dynamics between Korean ADRs and their underlying foreign stocks under various U.S. and Korean market conditions. When the U.S. market is stable, the underlying stocks dominate the price discovery process; when it is volatile, regardless of the state of the Korean market, the price discovery process reverses and the trading of ADRs leads to greater price discovery than that of the underlying stocks. Therefore, ADR trading dominates as the source of relevant price information when large changes occur in the U.S. market.