The risk and return of arbitrage in dual-listed companies

Abe de Jong, Leonard Rosenthal, Mathijs van Dijk

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42 Citations (Scopus)

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.
Original languageUndefined/Unknown
Pages (from-to)495-520
Number of pages26
JournalReview of Finance
Volume13
Issue number3
DOIs
Publication statusPublished - 2009

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