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

International Price Discovery for Emerging Market Stocks: Evidence from Indian GDRs 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

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

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2003 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1024843500510
Publisher site
See Article on Publisher Site

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 4, 2004

References

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