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Depositary Receipts and their underlying shares: A study on volatility

Magnusson, Erik and Gustafsson, Jens (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)
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author
Magnusson, Erik and Gustafsson, Jens
supervisor
organization
year
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
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},
  keyword      = {Cross listing,volatility,Depositary Receipts,EGARCH,Management of enterprises,Företagsledning, management},
  language     = {swe},
  note         = {Student Paper},
  title        = {Depositary Receipts and their underlying shares: A study on volatility},
  year         = {2011},
}