Mean-Reversion and Pairs Trading in Asian ADRs

Summary

The study examines Asian American Depositary Receipts in markets whose trading hours do not align with those of the underlying foreign shares. It separates ADR returns into components earned during U.S. market hours and overnight, and compares each ADR with SPY, an ETF tracking the S&P 500. The return difference is reported to behave as a mean-reverting series and is fitted to an Ornstein–Uhlenbeck process using maximum-likelihood estimation.

Based on that observation, the authors construct and backtest pairs strategies that trade ADRs against SPY, entering and exiting at selected spread levels. They report consistently positive payoffs when holding the ADR long and SPY short together. The provided account does not specify the sample period, trading thresholds, transaction costs, or risk-adjusted results, so it does not establish whether the backtested performance would persist after implementation costs or in other periods.

Key ideas

• The analysis separates Asian ADR returns into U.S.-session and overnight components.
• ADR returns relative to SPY are reported to form a mean-reverting series.
• An Ornstein–Uhlenbeck process is fitted to the return difference using maximum likelihood.
• The study backtests long-ADR, short-SPY pairs trades at selected entry and exit levels.
• Positive payoffs are reported, but transaction costs and other robustness details are not supplied.

Tags

# Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies


# Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies









American Depositary Receipts (ADRs) are exchange-traded certificates that rep- resent 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 asyn- chronous markets, we present methodologies and results of empirical analysis of their returns. In particular, we dissect their returns into intraday and overnight com- ponents 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 payoffs when long position in ADR and short position in SPY are simultaneously executed at selected entry and exit levels.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.