Linkages between the ADR Market and the Respective Macroeconomic Fundamentals – Cases for Brazil, Russia, India and China (the BRICs)

This study aims to provide an in-depth understanding of the BRICs’ ADR markets with respect to their linkages with the corresponding economic fundamentals. Specifically, the paper attempts to explore the (a) long run relationship and (b) short run lead-lag relationship between the ADR market and the major economic indicators for the home country. For a comparison purpose, similar research is conducted on the respective national stock market index. Using a Johansen-Vector Auto-regressive (VAR) approach with monthly data for period of January 2000 to February 2013, it finds that except for Russia the ADR market for other three nations has a long run relationship with the economic growth (denoted by IPI). This seems to be in line with the conventional view that ‘higher growth higher returns’. The long run relationship for ADR is similar with that for its national stock market in cases of Brazil, Russia and China. This suggests that the ADR markets for these countries are fundamentally efficient. The evidence for the short run dynamics suggests that past values of some of the economic indicators can be used to forecast Brazilian, Russian and Indian ADR returns. The predictability may allow investors to exploit excess returns on ADRs based on these macroeconomic variables. In general, the short run dynamics for the case of ADR are different from that for the stock market index. This may shed some lights into the informationally efficiency of the ADR market regarding macroeconomic information transmission. The evidence suggests that the market efficiency of the ADR market from the BRICs is at least somewhat different from that of the underlying stock market