The Risk and Return of Arbitrage in Dual-Listed Companies

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

See all articles by Abe de Jong

Abe de Jong

Monash University; University of Groningen; European Corporate Governance Institute (ECGI)

Leonard Rosenthal

Bentley University - Department of Finance

Mathijs A. Van Dijk

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

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

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

University of Groningen ( email )

Postbus 72
9700 AB Groningen
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Leonard Rosenthal

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Mathijs A. Van Dijk (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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