The Risk and Return of Arbitrage in Dual-Listed Companies
Abe De Jong
Erasmus University - Rotterdam School of Management
Bentley University - Department of Finance
Mathijs A. Van Dijk
Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)
Review of Finance, Vol. 13, Issue 3, pp. 495-520, 2009
This paper evaluates investment strategies that exploit the deviations from theoretical price parity in a sample of 12 dual-listed companies (DLCs) in the period 1980-2002. We show that simple trading rules produce abnormal returns of up to almost 10% per annum adjusted for systematic risk, transaction costs, and margin requirements. However, arbitrageurs face uncertainty about the horizon at which prices will converge and deviations from parity are very volatile. As a result, DLC arbitrage is characterized by substantial idiosyncratic return volatility and a high incidence of large negative returns, which are likely to impede arbitrage.
Keywords: F30, G14, G15Accepted Paper Series
Date posted: August 18, 2009
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