Adr Premium Variation Under Macroeconomic Influence


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  • Nonparametric test conducted. Null Hypothesis accepted.Significant correlation between ADR premium and macroeconomic series.Use of Spearmen method.
  • Adr Premium Variation Under Macroeconomic Influence

    1. 1. ADR Premium variation under Macroeconomic influence <br />Submitted by- Abhinav Arya<br /><br />
    2. 2. Contents<br />Introduction<br />Motivation<br />Project Objective & Scope<br />Methodology<br />Analysis<br />Assumptions<br />Conclusion<br />References<br />
    3. 3. Introduction<br />American Depository Receipts(ADR) : Similar to domestic shares but traded in foreign Stock Exchange.<br />Ideally , American Depository Receipts(ADR) and domestic shares should have same price.<br />
    4. 4. Introduction<br />Law of One Price violation is expected due to<br />Possibility of ADR Arbitrage due to Capital Controls<br />Time zone Difference in S&P 500 & NSE<br />[No Common Trading Hours]<br />
    5. 5. Indian Capital Controls permits conversion to ADR <br />if No. of ADR outstanding <> No. of ADR Issued<br />If ADR Price < Domestic Share Price then<br />If ADR Price > Domestic Share Price then<br />Factor: Capital Controls<br />Buy ADR<br />Convert to Shares<br />Sell in India<br />Buy Share<br />Convert to ADR<br />Sell in Foreign <br />
    6. 6. Factor : Time Zone<br />No Overlapping Trading Hours between S&P 500 and NSE.<br />
    7. 7. Factor : Time Zone<br />News about global economy & India after closure of Indian market impounds ADRs.<br />Direct investment in Indian Equities is only possible for registered FIIs.<br />
    8. 8. Motivation<br /> No major Research work in this field. <br /> -Limited factors have been studied for individual companies till now.<br /><ul><li>No Prior analysis on Post recession trends.
    9. 9. To identify other possible factors affecting ADR premium.</li></li></ul><li>Project Objective<br />To determine the influence of various Macroeconomic factors On ADR Premium. <br />Influence of Exchange rate , S&P 500 Index variation, NSE variation , FII investments etc. on ADRs of 5 major stocks collectively.<br />
    10. 10. Data gathering from official Stock websites.<br />Index Creation & Quantitative Analysis<br />Analysis of 5 Major stocks across sectors <br />Post recession Analysis<br />Project Scope<br />
    11. 11. Methodology<br />Stock inputs from NSE and US share markets<br />Creation of ADR Premium Index<br />Time series relationship study<br />Correlation & regression<br />ANOVA(Analysis of Variance)<br />Sensitivity Analysis etc.<br />
    12. 12. Indian ADRs<br />* ADR prices as on 11 February 2011* Domestic prices as on 11 February 2011 <br />
    13. 13. Methodology<br />Data Range : Jan 2007 to Dec 2010 <br />Data Collected from Leading Equity websites<br />Stock Selection criteria : Highly liquidity, Large Volume, Market Capitalization in US<br />
    14. 14. Macro Economic Series <br />Macro Economic series under study are:<br /><ul><li>Currency Exchange rate
    15. 15. Nifty Index
    16. 16. S & P 500 Index
    17. 17. ADR Premium Index
    18. 18. FII Net Purchase[Latest Addition*]</li></li></ul><li>Time Series<br />
    19. 19. Time Series<br />
    20. 20. Conceptual Framework<br />Price of “i”th ADR on day “d” = PADR<br />Price of “i”th Domestic Stock on day “d” = PDM<br /> <br />Curreny Exchange rate = ED<br /> <br />Conversion ratio of domestic stock into ADR = α<br />ADR premium index is calculated as mean of ADR premium of five stocks.<br />
    21. 21. ANALYSIS : Correlation<br />
    22. 22. IMPULSE Response Analysis<br />
    23. 23. ANALYSIS : Descriptive Stats,Collinearity<br />
    24. 24. Assumptions<br />Conversion Factor considered as 1<br />Stock value of First Day of the month was considered to evaluate the trend.<br />Closing price of each Index is considered on a particular day<br />
    25. 25. Conclusion<br />With respect to Law of One Price(LOP), ADR price is non- informative.<br />Indian ADRs have positive premium.<br />Macro economic factors [Currency rate, Nifty, S&P 500,FII etc. influence ADR Premium Index.<br />Positive Shocks to S&P 500 raises ADR Premium & FII.[Optimism & gains of US market tend to be transmitted to other markets through ADR or FII]<br />
    26. 26. Conclusion<br />Positive Shocks to Nifty leads to decrease in ADR Premium.<br />Inference:<br />Positive shock to ADR Premium Index has Positive effect on FII purchases in FOLLOWING DAYS.<br />[ When demand of Indian Equities goes Up, ADR market in New York shows this first. After this demand comes to domestic market.]<br />
    27. 27. References<br />Websites<br /><br /><br /><br /><br /><br />Journal<br />Understanding the ADR premium under market segmentation- Matthieu Stigler<br />Book<br />Statistical Methods for Practice and Research (Gaur)<br />
    28. 28. Thank You<br />