Depositary Receipts and their underlying shares: A study on volatility
(2011)Department of Business Administration
- Abstract
- In this paper we examine the volatility dynamics of cross-listed stocks. Specifically, we study deviations in volatility between a sample of Swedish stocks listed on the OMX Stockholm 30 Index (OMXS30) with Stockholmsbörsen (SSB, the Stockholm stock exchange) as their home market, and their corresponding DRs listed on Frankfurter Wertpapierbörse (FWB, the Frankfurt Stock Exchange). The main question we seek to answer is; Are there differences in volatility for DRs on the FWB and their underlying shares traded on SSB?
We use an EGARCH model to estimate volatility for the Swedish stocks trading on SSB and their corresponding DRs traded on FWB. In contrast to the Efficient Market Hypothesis and the LOP theory, we find significant differences... (More) - In this paper we examine the volatility dynamics of cross-listed stocks. Specifically, we study deviations in volatility between a sample of Swedish stocks listed on the OMX Stockholm 30 Index (OMXS30) with Stockholmsbörsen (SSB, the Stockholm stock exchange) as their home market, and their corresponding DRs listed on Frankfurter Wertpapierbörse (FWB, the Frankfurt Stock Exchange). The main question we seek to answer is; Are there differences in volatility for DRs on the FWB and their underlying shares traded on SSB?
We use an EGARCH model to estimate volatility for the Swedish stocks trading on SSB and their corresponding DRs traded on FWB. In contrast to the Efficient Market Hypothesis and the LOP theory, we find significant differences in volatility both on an individual and collective basis. In particular, volatility is higher for DRs traded on the FWB. According to our results this finding is not merely a consequence of higher relative expected returns for DRs. In fact, our results indicate that risk adjusted returns are higher in Stockholm. Thus, investors considering investing in Swedish cross-listed companies should evaluate the risk-return relationship between DRs and the home market shares. We further discuss potential theoretical explanations, for example the bid-ask spread, of the divergence in volatility and leave for future research to empirically investigate the impact of the mentioned reasons. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/2158136
- author
- Magnusson, Erik and Gustafsson, Jens
- supervisor
- organization
- year
- 2011
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Cross listing, volatility, Depositary Receipts, EGARCH, Management of enterprises, Företagsledning, management
- language
- Swedish
- id
- 2158136
- date added to LUP
- 2011-06-03 00:00:00
- date last changed
- 2012-04-02 19:00:32
@misc{2158136,
abstract = {{In this paper we examine the volatility dynamics of cross-listed stocks. Specifically, we study deviations in volatility between a sample of Swedish stocks listed on the OMX Stockholm 30 Index (OMXS30) with Stockholmsbörsen (SSB, the Stockholm stock exchange) as their home market, and their corresponding DRs listed on Frankfurter Wertpapierbörse (FWB, the Frankfurt Stock Exchange). The main question we seek to answer is; Are there differences in volatility for DRs on the FWB and their underlying shares traded on SSB?
We use an EGARCH model to estimate volatility for the Swedish stocks trading on SSB and their corresponding DRs traded on FWB. In contrast to the Efficient Market Hypothesis and the LOP theory, we find significant differences in volatility both on an individual and collective basis. In particular, volatility is higher for DRs traded on the FWB. According to our results this finding is not merely a consequence of higher relative expected returns for DRs. In fact, our results indicate that risk adjusted returns are higher in Stockholm. Thus, investors considering investing in Swedish cross-listed companies should evaluate the risk-return relationship between DRs and the home market shares. We further discuss potential theoretical explanations, for example the bid-ask spread, of the divergence in volatility and leave for future research to empirically investigate the impact of the mentioned reasons.}},
author = {{Magnusson, Erik and Gustafsson, Jens}},
language = {{swe}},
note = {{Student Paper}},
title = {{Depositary Receipts and their underlying shares: A study on volatility}},
year = {{2011}},
}