The relationship between the exchange rate and American depositary receipt (ADR) returns : in case of Chinese ADRs

Abstract

American Depositary Receipts (ADRs) as the representative of foreign stocks listed on the U.S. stock exchanges require more risk exposures than domestic stocks. This paper investigates the exchange risk effect on ADR returns in the case of Chinese ADRs. The general consensus has been that there is strong negative relationship between the ADR returns and the U.S. dollar value against the corresponding foreign currency. In this paper, it provides an empirical analysis of the relationship between Chinese ADR returns and the exchange rate of the U.S dollar per Chinese yuan. Using daily data over the 2008-2013 period, it generates an insignificant relationship between exchange rate change and ADR returns, meaning that the exchange rate is not a powerful indicator of the performance of Chinese ADRs.