Leung & Kang on ADRs

Tim Leung and Jamie Juhee Kang have posted Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies on SSRN with the following abstract:

American Depositary Receipts (ADRs) are exchange-traded certificates that represent shares of non-U.S. company securities. They are major financial instruments for investing in foreign companies. Focusing on Asian ADRs in the context of asynchronous markets, we present methodologies and results of empirical analysis of their returns. In particular, we dissect their returns into intraday and overnight components with respect to the U.S. market hours. The return difference between the S&P500 index, traded through the SPDR S&P500 ETF (SPY), and each ADR is found to be a mean-reverting time series, and is fitted to an Ornstein-Uhlenbeck process via maximum-likelihood estimation (MLE). Our empirical observations also lead us to develop and backtest pairs trading strategies to exploit the mean-reverting ADR-SPY spreads. We find consistent positive payouts when long position in ADR and short position in SPY are simultaneously executed at selected entry and exit levels.