Multi-market trading, price delay, and return predictability

Abstract Based on a setting of multi-market trading that involves American Depositary Receipts (ADRs) and underlying equities, we develop measures of price delay to capture the return predictability for both ADRs and the underlying equity markets. We show that ADRs with the severest price delay in responding to underlying equities command a remarkably high premium. The price delay of underlying equity in responding to corresponding ADR returns also positively predicts future returns of the equity. We further document evidence that limits to arbitrage explain the price delay premia in both markets.