How Far is Mumbai from Luxemburg and London? : Price and Volatility Linkages between Indian GDRs and Their Underlying Domestic Shares

Abstract

This paper tests for relationship between Indian GDRs traded in Luxembourg (London) and their underlying shares traded in Mumbai at two levels, viz., (a) between the stock prices at two exchanges; and (b) between the volatilities of the stock prices between the two exchanges. The relationship is studied between the GDR price and the domestic share price along with the appropriate exchange rates (INR-EUR/INR-GBP), the foreign stock market index (LuXX/FTSE100) and the NSE/BSElisted national stock index (Nifty/Sensex) using Level VAR models and DCC-GARCH models. Our sample comprises of Luxembourg GDRs issued by Ambuja Cements, Indiabulls Financial Services, IndusInd Bank, Kotak Mahindra Bank, Sterling International Enterprises, Tata Motors, Tata Power, and United Spirits; and London GDRs issued by Larsen & Toubro, State Bank of India, Axis Bank and Tata Steel. The results indicate strong association between the GDR prices and their underlying stocks. To be specific, VAR outcomes indicate that there is quite a bit of similarity between the two prices of scrips considered for this study – one trading in Mumbai and the other trading in Luxembourg (London). Further, DCC-GARCH model outcomes indicate that, there is by and large, high dynamic correlation between Indian GDRs traded in Luxembourg (London) and their underlying stocks listed in Mumbai. Further, we found the price and volatility linkages between GDRs listed in London Stock Exchange (LSE) and their underlying scrips trading in NSE to be qualitatively similar to the findings obtained in connection with Luxembourg GDRs. Such similarity in findings, notwithstanding the difference in degree of information disclosure requirements at London and Luxembourg, reflects the stock-exchange-invariant nature of Law of One Price (LOOP), which in turn is indicative of a less significant impact of foreign stock exchange per se, when it comes to price dynamics of dually-listed Indian stocks.