American depositary receipts return and volatility relationship: An application on developed and developing countries

Stock certificates issued by a firm to be traded in a foreign market are called depository receipts. Depositary receipts, which have an important place in international portfolio diversification, are called ADR (American Depositary Receipts) in the US stock exchanges. The aim of this study is to determine whether there is a causal relationship between the returns of American Depository Receipts (ADR) of developed and developing country companies traded in the New York Stock Exchange and their returns in their own country market. For this purpose, a causal relationship was tried to be determined by using weekly return series between 2002-2018 belonging to a total of 24 companies from 3 developed countries and 5 developing countries. To determine the existence of a causal relationship, the causality test in mean and variance developed by Hong (2001) was applied. According to the causality-in-mean test results, while a causal relationship from ADR to stock returns was found for one firm each from India and Germany, and two firms from South Africa, and a unidirectional causality relationship from stock return to ADR return has been determined for one firm each from Argentina, China, and Japan. In addition, a bidirectional causal relationship was observed in a mean for a firm in England. In the causality-in-variance test results, while a causality relationship from ADR return to stock returns was determined for one firm each from Germany and South Africa, a unidirectional causal relationship from stock returns to ADR return was determined for one firm from Germany and two firms each from England and Japan. In addition, it has been observed that there is a bidirectional causality-in-variance relationship for one firm each from Argentina and Japan.