International market integration and stock returns: an investigation of Pacific-Basin ADRs

Abstract

We examine the international market integration in the Pacific-Basi n market (particularly Hong Kong, Australia, Japan, and U.S.) by investigating the behavior of the Pacific-Basin ADRs (American Depository Receipts). First, we consider major determinants of the Pacific- Basin ADRs and underlying stock returns. More formally, we test the mean-variance efficiency of a global index consisting of Pacific-Basin ADR indices and U.S. equity portfolios. There is evidence that the factors that explain underlying stock returns are generally consistent with those that explain the corresponding ADR.s. The local factors (market or industry) explain ADRs and their underlying stock returns across both countries and industries better than the world factor for Hong Kong and Australia. In contrast, the world factors are dominant for Japan. Finally, we find that the global portfolio we consider is rejected for its mean-variance efficiency, implying some form of market segmentation between the Pacific-Basin markets and the U.S. stock market.