The price of inconvertible deposits: the stock market boom during the Argentine crisis

Abstract

The Argentine crisis witnessed, among other things, a deposit run, the suspension of deposit convertibility, and a "boom" in the stock market. We argue that this boom reflects the cost that depositors were willing to incur to get their money out of the banking system, in light of the impending risks. This boom was generalized to all stocks and more pronounced in liquid stocks. Furthermore, the boom was a symptom that deposits were effectively restricted and that investors were not able to circumvent capital controls. JEL Classification Codes: F3, G1

The ADR shadow exchange rate as an early warning indicator for currency crises

“…Chandar et al (2009) find that cross-listed stocks exhibit higher average returns than non-cross-listed stocks, in particular after the outbreak of financial crises. Another branch of the literature studies how the introduction of capital controls in the home market affects ADR pricing (Melvin, 2003;Levy Yeyati et al, 2004;Auguste et al, 2006). These authors argue that controls on capital outflows lead to a premium of the underlying stock price over the ADR price as the possibility of converting the local currency-denominated underlying stocks into US dollar-denominated ADRs (ADR conversion) represents a legal opportunity of capital flight.…”

A Market-Based Indicator of Currency Risk: Evidence from American Depositary Receipts

“…Several interesting studies consider the capital control episode in Argentina 2001/02 and find that prior to the devaluation of the peso, ADRs were traded at a price discount relative to their corresponding underlying stocks (e.g. Melvin (2003); Kadiyala (2004); Levy Yeyati et al (2004); Auguste et al (2006); Eichler et al (2009)). Melvin (2003), Levy Yeyati et al (2004) and Auguste et al (2006) attribute this finding to the fact that Argentinians were willing to pay a premium on domestic stocks in order to convert them into ADRs and then cash them into U.S. dollars -a legal way to circumvent the capital controls.…”

“…Melvin (2003); Kadiyala (2004); Levy Yeyati et al (2004); Auguste et al (2006); Eichler et al (2009)). Melvin (2003), Levy Yeyati et al (2004) and Auguste et al (2006) attribute this finding to the fact that Argentinians were willing to pay a premium on domestic stocks in order to convert them into ADRs and then cash them into U.S. dollars -a legal way to circumvent the capital controls. Kadiyala (2004) and Eichler et al (2009), on the other hand, argue that this relative discount reflects the market expectations of the true exchange rate that would result after the breakdown of the peg.…”

“…Our currency risk indicator therefore has the advantage of reflecting forward looking currency risk assessments that are available at a high frequency and in real time. Second, in contrast to existing approaches in the ADR literature that use relative price levels (Melvin (2003); Kadiyala (2004); Levy Yeyati et al (2004) ;Auguste et al (2006); Arquette et al (2008); Eichler et al (2009)), our measure is not restricted to capital control episodes. We consider the currency risk factor priced in ADR returns, which can also be derived for periods without restrictions on capital flows.…”

Crises, Capital Controls, And Financial Integration

“…Rabinovitch, Silva, and Susmel (2003) attribute the persistence of return differentials between ADRs and stocks in Chile to the presence of capital controls. Melvin (2003) and Auguste, et al (2006) examine the large ADR discounts that built in the midst of the Argentine crisis in early 2002, which Levy Yeyati, Schmukler, andVan Horen (2004) interpret as a reflection of the strict controls on capital outflows and foreign exchange transactions imposed at the time. Pasquariello (2008) presented evidence of large return differentials during crises.…”