Banking Sector Strength and the Volatility of Cross-Listed Securities

This paper tests the effect of banking sector strength on the volatility of American depository receipts (ADRs) listed on major U.S. exchanges. Using ADRs from 43 countries, we analyze whether cross-listed securities from more stable banking systems are associated with a lower degree of volatility. We study how the following country-level variables affect ADR volatility: Bank Capital/Total Assets, Bank Deposits/GDP, Bank Z Score, and Central Bank Assets/GDP. Our results confirm that there is such a relationship, with the deposits/GDP ratio of the home country, in particular, playing a central role in alleviating ADRs’ volatility. Our results suggest that countries with more stable banking sectors are likely to enjoy lower levels of stock price volatility for banking entities.