The abstract reads: Capital controls can induce large and persistent deviations from the Law of One Price for cross-listed stocks in international capital markets. A considerable literature has explored firm-specific factors which influence ADR pricing when LOP is violated. In this paper, we examine the interlinkages between Indian ADR premiums and macro economic time-series. We construct an ADR premium index, whereby diversification across firms diminishes idiosyncratic fluctuations associated with each security. We find that the S&P 500 index and the domestic Nifty index influence the ADR Premium Index. Positive shocks to the ADR premium index precede higher purchases by foreign investors on the domestic market, and precede positive returns on the domestic index.
Many practitioners in India believe that net FII flows matter greatly to stock market returns. But this belief is not borne out when you carefully look at the evidence. The VAR in the above paper says this one more time: in the context of the specification used in this paper (aimed at uncovering insight into a different issue, the ADR Premium) you don't see an impact of a rise in net FII flows upon stock prices.
On an interesting story about the ADR Premium for one stock (as opposed to macroeconomic thinking), see: Spike in the ADR Premium on Tata Motors by Anmol Sethy.
You might like to see: the stock of papers from the NIPFP Macro/Finance Group.