37 Pages Posted: 1 Jun 2009 Last revised: 30 Apr 2010
Date Written: August 1, 2008
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: 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
By Meb Faber