International Price Discovery for Emerging Market Stocks: Evidence from Indian GDRs

Authors: Kadapakkam P-R.¹; Misra L.¹; Tse Y.²

Source: Review of Quantitative Finance and Accounting, Volume 21, Number 2, September 2003 , pp. 179-199(21)

Publisher: Springer

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Abstract:

Given the rapid increase of the number of emerging market stocks being dually listed abroad, it is important to understand the role of the foreign markets in the price discovery process. We examine this issue by studying the role of the London Global Depositary Receipts (GDR) market for Indian stocks. We find that the London and the Mumbai prices are cointegrated despite arbitrage restrictions imposed by Indian government regulations. Each market contributes almost equally to price discovery, a result in contrast to the small contribution of offshore markets to price discovery of stocks based in developed economies. The GDR market's contribution to price discovery increases with the foreign ownership of the firm and GDR issue size. We also find evidence of significant volatility spillovers from the London market to the Indian market. The overall results suggest that offshore trading in emerging market stocks play a beneficial role by aiding domestic price discovery.

Keywords: Indian stocks; GDRs; international information transmission; emerging markets; price discovery; volatility spillover

Language: English

Document Type: Research article

Affiliations: 1: Department of Finance, College of Business, University of Texas at San Antonio, San Antonio, TX 78249-0633, USA Tel.: (210) 458-5314, Fax: (210) 458-6320 2: Department of Finance, College of Business, University of Texas at San Antonio, San Antonio, TX 78249-0633, USA Tel.: (210) 458-5314, Fax: (210) 458-6320. ytse@utsa.edu

Publication date: 2003-09-01