Statistical arbitrage and FX exposure with South American ADRs listed on the NYSE

Shadie Broumandi, Tobias Reuber


An American Depositary Receipt (ADR) represents ownership in the shares of a foreign company trading in US financial markets. We test a pair trading rule based on the mean reversion assumption for six South American stocks and their ADR counterparts on the NYSE. In our opinion, such a strategy should separate the spread risk from the currency risk. This paper aims to challenge the positive results found in similar settings. The main achievement is to show that isolating FX exposure turns such strategies that were presented as profitable to unprofitable and abnormal returns are just due to an appreciation in the home currencies versus the USD. Hence the results in some of literature should be revised.


ADR, FX exposure, statistical arbitrage, trading strategy

Full Text:


Show references Hide references

C. Alexander and A. Dimitriu (2005). “Indexing and Statistical Arbitrage”, the Journal of Portfolio Management, 31, pp. 50-63.

Citigroup Global Transaction Services (2011). “The Role of Depositary Receipts.”

G.Hong and R.Susmel (2003). “Pairs-Trading in the Asian ADR Market”, working paper. Available at:

Gatev, Evan G., William N. Goetzmann and K. Geert Rouwenhorst (1999). “Pairs Trading: Performance of a Relative Value Arbitrage Rule,” working paper, School of Management, Yale University.

James Velissaris (2010). “Diversified Statistical Arbitrage: Dynamically combining mean reversion and momentum investment strategies” Submitted for Review to the National Association of Active Investment Managers (NAAIM) for the Wagner Award Competition 2010.

K. Grobys (2012). "What are the benefits of globally invested mutual funds? Evidence from statistical arbitrage models” Journal of Applied Finance & Banking, vol.2, no.1, pp. 1-27.

K. Grobys (2012). “Do Business Cycles exhibit Beneficial Information for Portfolio Management? An Empirical Application of Statistical Arbitrage”, Review of Finance and Banking, 2(1), pp. 43-59.

Khandani, Amir E., and Andrew W. Lo (2008). “What happened to the quants in August 2007?: Evidence from factors and transactions data”, working paper, MIT.

Lin, Y., M. McCrae and C. Gulati (2006). “Loss Protection in Pairs Trading through Minimum Profit Bounds: A Cointegration Approach”, Journal of Applied Mathematics and Decision Sciences 6, pp.1-14.

Lo, A. W. and MacKinlay, A. C. (1990). “When are contrarian profits due to stock market overreaction?” The Review of Financial Studies, Vol. 3, No. 2, pp. 175-205.

Nath, P., (2003). “High Frequency Pairs Trading with U.S Treasury Securities: Risks and Rewards for Hedge Funds”, working paper (London Business School).


  • There are currently no refbacks.

Crossref Cited-by (1)

The listed references are provided by Cited-by (Crossref service) and thus do not represent the full list of sources citing the article.

Christopher Krauss
Journal of Economic Surveys  vol: 31,  issue: 2,  first page: 513,  year: 2017