Arbitrage in Dual Classes: The Case of Berkshire Hathaway

46 Pages Posted: 10 Aug 2008 Last revised: 21 Aug 2008

Date Written: August 11, 2008

Abstract

I test the existence of arbitrage risk due to a lack of substituting securities, using the no-arbitrage condition implied by the one-way conversion rule from Class A to Class B shares of Berkshire Hathaway. This rule prevents large premiums but allows for significant and time-varying discounts on Class B shares, supporting the existence of arbitrage risk. I provide an estimate of arbitrage costs at 0.05% in recent years. I also document that Class B trades reflect both positive and negative information onto Class A prices, and that unusual price deviations between these two share classes predict future Class A returns.

Keywords: The law of one price, market efficiency, financial decision

JEL Classification: G14, G32

Suggested Citation

Lei, Adam Y.C., Arbitrage in Dual Classes: The Case of Berkshire Hathaway (August 11, 2008). Available at SSRN: https://ssrn.com/abstract=1214736 or http://dx.doi.org/10.2139/ssrn.1214736

Adam Y.C. Lei (Contact Author)

Midwestern State University ( email )

3410 Taft Blvd
Wichita Falls, TX 76308
United States
(940) 397-4403 (Phone)
(940) 397-4693 (Fax)

HOME PAGE: http://www.adamyclei.com/

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