Understanding the ADR premium under market segmentation

Capital controls can induce large and persistent deviations from the Law of One Price for cross-listed stocks in international capital markets. A considerable literature has explored rm-specic factors which in uence ADR pricing when LOP is violated. In this paper, we examine the interlinkages between Indian ADR premiums and macroe- conomic time-series. We construct an ADR premium index, whereby diversication across rms diminishes idiosyncratic uctuations asso- ciated with each security. We nd that the S&P 500 index and the domestic Nifty index in uence the ADR Premium Index. Positive shocks to the ADR premium index precede higher purchases by for- eign investors on the domestic market, and precede positive returns on the domestic index. [Working Paper No. 2010-71]