Transmission of pricing information between level III ADRs and their underlying domestic stocks: Empirical evidence from India

•Interdependence and Granger causality between level III ADRs and underlying stocks in India is studied.•Bi-directional transmission of price information flow between ADRs and the underlying is found.•ADRs tend to over react to their own lagged price changes.•ADRs tend to under-react to the lagged price changes in the underlying domestic stocks.

This paper studies the price interdependence and transmission pattern between a group of level III American Depository Receipts (ADRs) and their respective underlying stock prices in India. We investigate the transmission dynamics of pricing information between the ADRs and their underlying stocks. Using a Vector Error Correction Model (VECM) with error correction terms, we find bidirectional transmission of price information flow between the ADRs and their underlying stocks. Our results provide evidence of bidirectional causality between the National Stock Exchange and the NASDAQ/New York Stock Exchange. We find that the ADRs tend to overreact to their own lagged price changes and tend to underreact to the lagged price changes in the underlying domestic stocks.