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The Risk and Return of Arbitrage in Dual-Listed CompaniesAbe De JongErasmus University - Rotterdam School of Management Leonard RosenthalBentley University - Department of Finance Mathijs A. Van DijkErasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM) August 1, 2008 Review of Finance, Vol. 13, 495-520, 2009. Abstract: 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.
Number of Pages in PDF File: 37 Keywords: Arbitrage, dual-listed companies, idiosyncratic risk, anomalies, international finance JEL Classification: F30, G14, G15 Accepted Paper SeriesDate posted: June 1, 2009 ; Last revised: April 30, 2010Suggested CitationContact Information
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