Time-varying risk premia in American depository receipt returns

This paper examines the role of the world market, the home market, and exchange rate factors in the conditional pricing of a sample of 80 American Depository Receipts (ADRs) from 11 developed markets. Estimations based on a Multivariate GARCH in mean (MGARCH-M) model find that changes over time have led to the market for ADRs to become more integrated with the world market, though there is still substantial evidence of segmentation. The findings suggest that US investors in ADRs as a class are exposed to all three forms of risk. Some ADRs exhibit pricing of at least one risk factor and sometimes all three factors.