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The Risk and Return of Arbitrage in Dual-Listed Companies

37 Pages Posted: 1 Jun 2009 Last revised: 30 Apr 2010

Abe de Jong

Rotterdam School of Management, Erasmus University

Leonard Rosenthal

Bentley University - Department of Finance

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

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Date Written: August 1, 2008

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.

Keywords: Arbitrage, dual-listed companies, idiosyncratic risk, anomalies, international finance

JEL Classification: F30, G14, G15

Suggested Citation

de Jong, Abe and Rosenthal, Leonard and Van Dijk, Mathijs A., The Risk and Return of Arbitrage in Dual-Listed Companies (August 1, 2008). Review of Finance, Vol. 13, 495-520, 2009.. Available at SSRN: https://ssrn.com/abstract=525282

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Leonard Rosenthal

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Mathijs Van Dijk (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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