While a healthy empirical literature exists on international diversification and its benefits, surprisingly few studies have examined the risk characteristics and efficacy of asset pricing models for one avenue of international diversification – investments in American Depository Receipts (ADRs). Originating in approximately 1927, ADRs provide an opportunity for investors to indirectly purchase shares of foreign firms. ADRs represent a claim to a given number of shares of a foreign firm held by a U.S. financial institution (e.g., Bank of New York). With the increasingly significant presence of ADR trading in the American stock markets – increasing six-fold between 1990 and 1999 - an analysis of these securities’ diversification impact on a U.S. stock portfolio and tests of the acuity of asset pricing models for predicting their returns should contribute to investors’ utility in efficiently diversifying risk.

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Copyright © 2002 Elsevier Inc.

The definitive version is available at: http://www.journals.elsevier.com/research-in-international-business-and-finance

Full citation:

Arnold, Tom, Lance Nail, and Terry D. Nixon. "ADR Risk Characteristics and Measurement." Research in International Business and Finance 16 (2002): 451-72.