Mispricing and Lasting Arbitrage between Parallel Markets in the Czech Republic

CERGE-EI Working Paper Series 136

33 Pages Posted: 27 Apr 1999

See all articles by Jan Hanousek

Jan Hanousek

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute); Charles University in Prague; Academy of Sciences of the Czech Republic; Centre for Economic Policy Research (CEPR)

Libor Nemecek

CERGE-EI

Multiple version iconThere are 2 versions of this paper

Date Written: July 1998

Abstract

If co-existing parallel markets are efficient, then arbitrage will maintain a correct pricing relationship. A related question is whether two parallel emerging markets offering more or less the same securities but using different institutional designs, can behave as asingle, fully integrated market. In this paper we introduce an explicit model of price convergence (with transaction costs), in which price differences are studied using levels of arbitrage activity. For the empirical analysis we use two parallel markets in the Czech Republic 97 the Prague Stock Exchange (PSE) and the RMS (over-the-counter system). In particular, we study the degree of arbitrage activity for different segments of the PSE and the evolution of arbitrage in the early history of these emerging markets. The empirical results provide evidence of market linkage for actively traded stocks. We find a significant relationship between the segment of the market to which a given firm belongs and the estimated level of arbitrage trading.Moreover, the level of arbitrage activity increases over time for all market segments,and, as the markets mature, the differences among the segments gradually disappear.

JEL Classification: D40, E44, G12, G14

Suggested Citation

Hanousek, Jan and Nemecek, Libor, Mispricing and Lasting Arbitrage between Parallel Markets in the Czech Republic (July 1998). CERGE-EI Working Paper Series 136, Available at SSRN: https://ssrn.com/abstract=157608 or http://dx.doi.org/10.2139/ssrn.157608

Jan Hanousek (Contact Author)

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

Politickych veznu 7
Prague 1, 111 21
Czech Republic
420 2 2400 5119 (Phone)
420 2 2421 1374 (Fax)

HOME PAGE: http://www.cerge-ei.cz

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

Academy of Sciences of the Czech Republic ( email )

Narodni 3, 111 42
Praha 1, 117 20
Czech Republic

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Libor Nemecek

CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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