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 stock...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2003-09, Vol.21 (2), p.179-199
Main Authors: Palani-Rajan Kadapakkam, Misra, Lalatendu, Tse, Yiuman
Format: Article
Language:English
Subjects:
Accounting
Arbitrage
Capital market
Economics
Emerging markets
Finance
Global depositary receipts
India
International finance
New stock market listings
Prices
Quantitative analysis
Spillovers
Stock exchange
Stock exchanges
Studies
Volatility
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Summary: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. [PUBLICATION ABSTRACT]
ISSN:0924-865X
1573-7179
DOI:10.1023/A:1024843500510